Cartwright Communications Is Considering Making a Change to Its Capital

question 86

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, rM σ rRF, 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:

Job Analysis

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Sales Position

A role within a company focused on selling products or services, typically involving activities like prospecting for new clients, presenting products, and closing sales.

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