Laramie Trucking's CEO Is Considering a Change to the Company's

question 22

Multiple Choice

Laramie Trucking's CEO is considering a change to the company's capital structure,which currently consists of 25% debt and 75% equity.The CFO believes the firm should use more debt,but the CEO is reluctant to increase the debt ratio.The risk-free rate,r_RF,is 5.0%,the market risk premium,RP_M,is 6.0%,and the firm's tax rate is 40%.Currently,the cost of equity,r_s,is 11.5% as determined by the CAPM.What would be the estimated cost of equity if the firm used 60% debt? (Hint: You must first find the current beta and then the unlevered beta to solve the problem. )

• A) 10.95%
• B) 11.91%
• C) 12.94%
• D) 14.07%
• E) 15.29%

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