Technico Has Determined That Its Optimal Capital Structure Is 40

question 63

Multiple Choice

Technico has determined that its optimal capital structure is 40% debt, at which point its weighted cost of capital, ka, is 13.7%.Due to financial problems, the firm has decided to raise the proportion of debt to 50%, which will increase its weighted cost of capital to 14.4%.What is the effect on the stock price of Technico? The current dividend is $1.60 and the long-term growth rate of dividends is expected to be 8.5%.

• A)Decrease $3.65
• B)Decrease $3.96
• C)Increase $3.65
• D)Increase $3.96

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Definitions:

Prosopagnosia

An impairment in the brain preventing the recognition of faces, often termed as face blindness.

Emotion

Complex psychological states involving three distinct components: a subjective experience, a physiological response, and a behavioral or expressive response.

Absolute Thresholds

The minimum intensity of stimulation that must occur before you experience a sensation, varying across sensory modalities.

Weber's Law

A principle that states the smallest change in a stimulus that can be detected is a constant proportion of the original stimulus.