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:

Percent financed
Percent financed
Debt-to-equity
Bond
Before-tax
with debt (wd)
with equity (ws)
ratio = wd/ws = (D/S)
Rating
cost of debt
0.10
0.90
0.10/0.90 = 0.11
AAA
   7.0%
0.20
0.80
0.20/0.80 = 0.25
AA
7.2
0.30
0.70
0.30/0.70 = 0.43
A
8.0
0.40
0.60
0.40/0.60 = 0.67
BBB
8.8
0.50
0.50
0.50/0.50 = 1.00
BB
9.6
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 25%.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. ws = 0.9; wd = 0.1; WACC = 11.73%
B. ws = 0.8; wd = 0.2; WACC = 10.78%
C. ws = 0.7; wd = 0.3; WACC = 9.11%
D. ws = 0.6; wd = 0.4; WACC = 9.50%
E. ws = 0.5; wd = 0.5; WACC = 11.37%


Answer: D

Business

You might also like to view...

In which of the following does the buyer usually try out the goods for the buyer's own use?

A) Consignment and sale or return B) Sale or return C) Consignment, sale or return, and sale on approval D) Sale on approval E) Sale or return and sale on approval

Business

A company's board of directors votes to declare a cash dividend of $1.00 per share on its 12,000 common shares outstanding. The journal entry to record the payment of the cash dividend is:

A. Debit Dividend Expense $12,000; credit Cash $12,000. B. Debit Common Dividend Payable $12,000; credit Cash $12,000. C. Debit Dividend Expense $12,000; credit Common Dividend Payable $12,000. D. Debit Retained Earnings $12,000; credit Common Dividend Payable $12,000. E. Debit Common Dividend Payable $12,000; credit Retained Earnings $12,000.

Business

The difference between the left-hand side and right-hand side of a less-than-or-equal-to constraint is referred to as

A) surplus. B) constraint. C) slack. D) shadow price. E) None of the above

Business

Trademarks that are inherently distinctive are classified as:

a. descriptive b. arbitrary and fanciful c. suggestive d. generic e. none of the other choices

Business