Lauterbach Corporation Uses No Debt, Its Beta Is 1

question 42

Multiple Choice

Lauterbach Corporation uses no debt, its beta is 1.10, and its tax rate is 40%. However, the CFO is considering moving to a capital structure with 30% debt and 70% equity. If the risk-free rate is 5.0% and the market risk premium is 6.0%, by how much would the capital structure shift change the firm's cost of equity?

• A) 1.53%
• B) 1.70%
• C) 1.87%
• D) 2.05%
• E) 2.26%

---

Definitions:

Time-Compression

Strategies or technologies that reduce the time between the initiation and completion of a process or project.

Policy Decisions

High-level choices made by organizations or governments that set directions, establish regulations, or guide the implementation of strategies.

Monte Carlo Simulation

A statistical technique that uses random sampling and repeated trials to calculate outcomes of uncertain variables.

Mathematical Model

A representation of a system, process, or relationship in mathematical form, using symbols and equations.