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, rRF, is 5.0%, the market risk premium, RPM, is 6.0%, and the firm's tax rate is 40%.Currently, the cost of equity, rs, 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%
Correct Answer:
Verified
Correct Answer:
Verified
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