LeCompte Learning Solutions Is Considering Making a Change to Its

question 32

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, rs.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, " bU, 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) wc = 0.9; wd = 0.1; WACC = 14.96%
• B) wc = 0.8; wd = 0.2; WACC = 10.96%
• C) wc = 0.7; wd = 0.3; WACC = 7.83%
• D) wc = 0.6; wd = 0.4; WACC = 10.15%
• E) wc = 0.5; wd = 0.5; WACC = 10.18%

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Definitions:

Rate of Return

The returns or deficits generated by an investment over a certain span, represented as a percentage of the initial financial commitment.

Annual Dividend

The total dividend payment a company makes to its shareholders in a year, often expressed on a per share basis.

Investor's Return

The amount of profit or loss an investor realizes on an investment, reflecting the overall performance and earnings from the investment.

Dividend Value

The portion of a company's earnings distributed to shareholders, typically in the form of cash payments.