Aaron Athletics Is Trying to Determine Its Optimal Capital Structure

question 9

Multiple Choice

Aaron Athletics is trying to determine its optimal capital structure. The company's capital structure consists of debt and common stock. In order to estimate the cost of debt, the company has produced the following table:
The company uses the CAPM to estimate its cost of common equity, rs.
The risk-free rate is 5% and the market risk premium is 6%. Aaron estimates that if it had no debt its beta would be 1.0. (Its "unlevered beta," bU, equals 1.0.) The company's tax rate, T, is 40%.
On the basis of this information, what is the company's optimal capital structure, and what is the firm's cost of capital at this optimal capital structure?

• A) wc = 0.9; wd = 0.1; WACC = 14.96%
• B) wc = 0.8; wd = 0.2; WACC = 10.96%
• C) wc = 0.7; wd = 0.3; WACC = 7.83%
• D) wc = 0.6; wd = 0.4; WACC = 10.15%
• E) wc = 0.5; wd = 0.5; WACC = 10.18%

Identify the types and characteristics of experimental designs, including completely randomized and factorial designs.

Understand the concept of degrees of freedom in the context of ANOVA.

Distinguish between different elements of ANOVA, such as factors, treatments, and replications.

Calculate the F ratio in ANOVA and understand its significance.

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Definitions:

Labour

The human effort, both physical and mental, used in the production process.

Competitive Bidding

A purchasing process in which suppliers submit bids to win the rights to fulfill a contract.

Bid Price

The price a buyer is willing to pay for a good, service, or financial instrument.

Incremental Costs

Costs that change with the level of output or activity, directly associated with a specific business decision.