Serendipity Inc

question 23

Multiple Choice

Serendipity Inc.is re-evaluating its debt level.Its current capital structure consists of 80% debt and 20% common equity,its beta is 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 capital structure shift change the firm's cost of equity?

• A) −5.20%
• B) −5.78%
• C) −6.36%
• D) −6.99%
• E) −7.69%

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