Use the Information for the Question(s)below

question 48

Multiple Choice

Use the information for the question(s) below.
Suppose that Rose Industries is considering the acquisition of another firm in its industry for $100 million.The acquisition is expected to increase Rose's free cash flow by $5 million the first year,and this contribution is expected to grow at a rate of 3% every year thereafter.Rose currently maintains a debt to equity ratio of 1,its corporate tax rate is 21%,its cost of debt rD is 6%,and its cost of equity rE is 10%.Rose Industries will maintain a constant debt-equity ratio for the acquisition.
-Alpha Beta Corporation maintains a constant debt-equity ratio of 0.5.The total value of the firm is $30 million,and existing debt is riskless.Over the next three months,news will come out that will either raise or lower Alpha Beta's value by 10%.How will Alpha Beta adjust its debt level in response to keep its debt-equity ratio constant?

• A)Either increase by $1 million or decrease by $1 million.
• B)Either increase by $1.5 million or decrease by $1.5 million.
• C)Either increase by $3 million or decrease by $3 million.
• D)There will be no change-the debt-equity ratio will remain constant.

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Definitions:

Paradigm

A typical example or pattern of something; a model, or a framework containing the set of practices that defines a scientific discipline at any particular period of time.

Attachment

The deep emotional bond that develops between a child and a caregiver, providing the child with emotional security.

Bowlby

John Bowlby was a British psychologist and psychiatrist known for developing attachment theory, which describes the dynamics of long-term relationships between humans.

Secure Attachment

A type of emotional bond characterized by trust and a sense of security, typically formed between a child and their caregiver.