Use the Information for the Question(s)below

question 79

Multiple Choice

Use the information for the question(s) below.
Assume that Rose Corporation's (RC) EBIT is not expected to grow in the future and that all earnings are paid out as dividends.RC is currently an all-equity firm.It expects to generate earnings before interest and taxes (EBIT) of $6 million over the next year.Currently RC has 5 million shares outstanding and its stock is trading for a price of $12.00 per share.RC is considering borrowing $12 million at a rate of 6% and using the proceeds to repurchase shares at the current price of $12.00.
-Prior to any borrowing and share repurchase,the equity cost of capital for RC is closest to:

• A)11%.
• B)10%.
• C)12%.
• D)9%.

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Definitions:

Concept of Density

A measure of mass per unit volume of a substance, often used in physics and chemistry to characterize materials.

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The psychological feeling of discomfort or stress due to being in overly populated or cramped spaces.

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A piece of furniture in an office setting designed to accommodate multiple participants during meetings and discussions.

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The tangible, concrete surroundings in which an organism or group operates, including both natural and built structures.