Cartwright Communications Is Considering Making a Change to Its Capital

question 58

Multiple Choice

Cartwright Communications is considering making a change to its capital structure to reduce its cost of capital and increase firm value.Right now,Cartwright 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,r_M -r_RF,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 Cartwright'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%

---

Definitions:

Biosphere 2

An Earth system science research facility located in Arizona, USA, designed to study and model the interactions within ecosystems in a closed system.

Self-Sustainability

The ability of a system, community, or individual to maintain and support itself without relying on external resources.

Nihilism

A philosophy that rejects generally accepted or fundamental aspects of human life, such as objective truth, morality, or meaning.

Moral Beliefs

Principles or values that govern an individual's understanding of right and wrong.