Stephens Electronics Is Considering a Change in Its Target Capital

question 40

Multiple Choice

Stephens Electronics is considering a change in its target capital structure, which currently consists of 25% debt and 75% equity. The CFO believes the firm should use more debt, but the CEO is reluctant to increase the debt ratio. The risk-free rate, rRF, is 5.0%, the market risk premium, RPM, is 6.0%, and the firm's tax rate is 40%. Currently, the cost of equity, rs, is 11.5% as determined by the CAPM. What would be the estimated cost of equity if the firm used 60% debt? (Hint: You must first find the current beta and then the unlevered beta to solve the problem.)

• A) 10.95%
• B) 11.91%
• C) 12.94%
• D) 14.07%
• E) 15.29%

---

Definitions:

Utility

Software designed to help analyze, configure, optimize or maintain a computer system.

Computer Crashes

Instances where a computer or a software abruptly stops functioning due to errors, overloading, or hardware failure.

Subscription Software

A model whereby the user pays a fee to use the software. The software is downloaded and installed locally but is routinely updated by connection to the manufacturer’s server.

Software

Programs and operational information used by a computer.