Cartwright Communications Is Considering Making a Change to Its Capital

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,r_M -r_RF,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%

Correct Answer:

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