A Firm Is Currently Financed with $300 of Debt and $700

question 58

Multiple Choice

A firm is currently financed with $300 of debt and $700 of equity. The expected return on the debt is 9%. The market beta of the firm's equity is 1.50; the risk-free rate is 4%; and the equity premium is 6%. The firm pays taxes at the marginal rate of 35%.
-Refer to the information above. The firm is considering increasing its debt to $400 and using the funds to repurchase some of its stock. This is likely to increase the expected return on debt
To 10%. All else equal, what will the new market beta of the firm's equity be? Round your
Answer to the nearest tenth.

• A)1.6
• B)1.0
• C)2.3
• D)The market beta of the equity will be unchanged.

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Definitions:

Pineal Gland

A small endocrine gland in the brain that produces the hormone melatonin, which regulates sleep patterns.

Prolactin

A hormone produced by the anterior pituitary gland that stimulates milk production in mammals.

Pituitary Gland

A small, pea-sized gland located at the base of the brain, critical in controlling growth, metabolism, and reproductive functions.