Technico Has Determined That Its Optimal Capital Structure Is 40

question 6

Multiple Choice

Technico has determined that its optimal capital structure is 40% debt, at which point its weighted cost of capital, k_a, is 13.7%. Due to financial problems, the firm has decided to raise the proportion of debt to 50%, which will increase its weighted cost of capital to 14.4%. What is the effect on the stock price of Technico? The current dividend is $1.60 and the long-term growth rate of dividends is expected to be 8.5%.

• A) Decrease $3.65
• B) Decrease $3.96
• C) Increase $3.65
• D) Increase $3.96

---

Definitions:

Confidence Interval

It expresses the degree of uncertainty or certainty in a sampling method, represented as a range within which an estimated parameter is expected to lie.

Alpha (α)

In statistics, it represents the significance level, a threshold determining the probability of rejecting a true null hypothesis.

Population Standard Deviation

Measures the dispersion of a set of data points in a population from its mean, indicating how spread out the data points are.

Interval Estimate

An estimate of a population parameter that provides a range of values believed to contain the parameter with a certain level of confidence.