Simon Software Co

question 3

Multiple Choice

Simon Software Co. is trying to estimate its optimal capital structure. Right now, Simon has a capital structure that consists of 20% debt and 80% equity, based on market values. (Its D/S ratio is 0.25.) The risk- free rate is 6% and the market risk premium, rM - rRF, is 5%. Currently the company's cost of equity, which is based on the CAPM, is 12% and its tax rate is 40%. What would be Simon's estimated cost of equity if it were to change its capital structure to 50% debt and 50% equity?

• A) 13.00%
• B) 13.64%
• C) 14.35%
• D) 14.72%
• E) 15.60%

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Definitions:

Metric Measurements

A system of measurement based on meters, liters, and grams, utilized globally except in a few countries.

Precision Measurement

The process of measuring objects with high accuracy and resolution to ensure they meet specified dimensions or standards.

Micrometers

Precision measuring instruments capable of taking very small measurements, often used in mechanical engineering and machining to ensure accuracy to the thousandth of a millimeter.

Dial Calipers

Precision measuring tools that use a calibrated dial to measure the distance between two opposite sides of an object, often used in mechanical engineering and metalworking.