1 Lucky Cement is trying to establish its optimal capital structure. Its current capital structure consists of 20% debt and 80% equity; however, the CEO believes that the firm should use more debt. The risk-free rate, rRF, is 5%; the market risk premium, RPM, is 6%; and the firms tax rate is 40%. Currently, Lucky Cement has beta of 1.5. What would be Lucky Cements estimated cost of equity if it changed its capital structure to 40% debt and 60% equity? Should the company opt new capital structure? (decide based on the cost of equity computations)?

Explain Why you agree or disagree with the following statements. The answer should not be more than 3 sentences. Be specific in your answer and write only the most relevant explanations

1. A firm should select the capital structure that is fully levered
2. Leveraged beta represents fundamental operating risk.
3. MM Proposition I with no tax supports the argument that a firm should borrow money to the point where the tax benefit from debt is equal to the cost of the increased probability of financial distress