Use the Information for the Question(s)below

question 56

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.
-Following the borrowing of $12 million and subsequent share repurchase,the equity cost of capital for RC is closest to:

• A)12%.
• B)9%.
• C)11.0%.
• D)10%.

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Definitions:

Burden Of Loss

Refers to the responsibility to bear the financial impact of damage, loss, or destruction of property in legal or insurance contexts.

First Party

The entity or individual directly involved in a transaction or legal agreement, such as the buyer in a purchase agreement.

Warranty Liability

Legal obligation arising from a promise or assurance given by a seller that certain statements about a product or service are true or will be met.

Bearer Instrument

A financial document that entitles the holder or bearer to the rights or assets it represents, without the need to prove ownership.