LeCompte Learning Solutions Is Considering Making a Change to Its

question 30

Multiple Choice

LeCompte Learning Solutions is considering making a change to its capital structure in hopes of increasing its value. The company's capital structure consists of debt and common stock. In order to estimate the cost of debt, the company has produced the following table: The company uses the CAPM to estimate its cost of common equity, r_s. The risk-free rate is 5% and the market risk premium is 6%. LeCompte estimates that if it had no debt its beta would be 1.0. (Its "unlevered beta," b_U, equals 1.0.) The company's tax rate, T, is 40%.
On the basis of this information, what is LeCompte's optimal capital structure, and what is the firm's cost of capital at this optimal capital structure?

• A) w_c = 0.9; w_d = 0.1; WACC = 14.96%
• B) w_c = 0.8; w_d = 0.2; WACC = 10.96%
• C) w_c = 0.7; w_d = 0.3; WACC = 7.83%
• D) w_c = 0.6; w_d = 0.4; WACC = 10.15%
• E) w_c = 0.5; w_d = 0.5; WACC = 10.18%

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Definitions:

GEO

An abbreviation for Geostationary Orbit, a circular orbit 35,786 kilometers above the Earth's equator and following the direction of the Earth's rotation.

LEO

Low Earth Orbit, a satellite system orbiting relatively close to Earth, often used for telecommunications, military, and observation purposes.

Footprint

In a technological context, the term often refers to the amount of space occupied by a device, or the environmental impact of producing and disposing of it.

GEO

A Geostationary Earth Orbit is a circular path located 35,786 kilometers directly above the Earth's equator, moving in the same direction as the Earth rotates.