Serendipity Inc

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%

Correct Answer:

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