Suppose That Rearden Metal Currently Has No Debt and Has

question 70

Multiple Choice

Suppose that Rearden Metal currently has no debt and has an equity cost of capital of 12%.Rearden is considering borrowing funds at a cost of 6% and using these funds to repurchase existing shares of stock.Assume perfect capital markets.If Rearden borrows until they achieved a debt-to-equity ratio of 50%,then Rearden's levered cost of equity would be closest to:

• A)10.0%.
• B)12.0%.
• C)15.0%.
• D)16.0%.

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Definitions:

Separation of Powers

A principle of governance where the state's powers are divided among distinct branches to prevent any one group from gaining too much power.

Federalism

A system of government in which power is divided between a central (national) government and regional (state or provincial) governments.

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Describes a system where officials are chosen by voters directly, rather than by an intermediary body or appointment.

Article II

A section of the United States Constitution that outlines the executive branch of the federal government, including the powers and responsibilities of the president.