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%

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Definitions:

Gross Profit Method

An inventory estimation technique that calculates inventory value by applying gross profit margins to sales.

Insurance Claim

A request for payment made by an insured individual to their insurance company, seeking compensation for a covered loss or policy event.

Inventory Loss

The loss of inventory due to factors such as theft, spoilage, or obsolescence, impacting the total inventory value.

Beginning Inventory

Beginning inventory is the value of inventory on hand at the start of an accounting period, before any purchases or production have been added.