Vafeas Inc

question 31

Multiple Choice

Vafeas Inc.'s capital structure consists of 80% debt and 20% common equity,it has a beta of 1.60,and its tax rate is 35%.However,the CFO thinks the company has too much debt,and he is considering moving to a capital structure with 40% debt and 60% equity.The risk-free rate is 5.0% and the market risk premium is 6.0%.By how much would the firm's cost of equity change as a result of altering its capital structure?

• A)-5.20%
• B)-5.78%
• C)-6.36%
• D)-6.99%

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Definitions:

Cease-And-Desist Order

A legal order issued by a court or government authority demanding the halting of specified activities.

Administrative

Pertaining to the execution of laws and the management of public affairs; often related to the functions and activities of government agencies.

Judicial Order

A directive issued by a court or a judge requiring a person or entity to do or refrain from doing something.

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Activities or actions that are forbidden by law and subject to criminal penalties or other sanctions.