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Morales Publishing's Tax Rate Is 40%, Its Beta Is 1

Question 10

Multiple Choice

Morales Publishing's tax rate is 40%, its beta is 1.10, and it uses no debt.However, the CFO is considering moving to a capital structure with 30% debt and 70% equity.If 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) 1.53%
B) 1.70%
C) 1.87%
D) 2.05%
E) 2.26%

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