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%

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Definitions:

Marketing Strategy

An organization's strategy that combines all of its marketing goals into one comprehensive plan, leveraging its resources to provide a competitive edge.

Diversified

The quality of having a wide variety or range of different things or activities.

SWOT Analysis

A strategic planning tool that evaluates the Strengths, Weaknesses, Opportunities, and Threats involved in a project or business venture.

Strengths

Positive attributes of an organization. These are internal resources and capabilities that support a company to achieve its mission, goals, and competitive advantage.