Laramie Trucking's CEO is considering a change to the company's capital structure, which currently consists of...

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, r_RF, is 5.0%, the market risk premium, RP_M, is 6.0%, and the firm's tax rate is 25%. Currently, the cost of equity, r_s, 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. 13.58%

b. 14.77%

c. 12.50%

d. 11.50%

e. 16.05%

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jeff jeffy answered 2 months ago

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