Use the Information for the Question(s)below

question 33

Multiple Choice

Use the information for the question(s) below.
Rockwood Enterprises is currently an all-equity firm and has just announced plans to expand their current business.In order to fund this expansion,Rockwood will need to raise $100 million in new capital.After the expansion,Rockwood is expected to produce earnings before interest and taxes of $50 million per year in perpetuity.Rockwood has already announced the planned expansion,but has not yet determined how best to fund the expansion.Rockwood currently has 16 million shares outstanding and following the expansion announcement these shares are trading at $25 per share.Rockwood has the ability to borrow at a rate of 5% or to issue new equity at $25 per share.
-If Rockwood finances their expansion by issuing new stock,what will Rockwood's cost of equity capital be?

• A)12%
• B)15%
• C)8%
• D)10%

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Definitions:

Record-Keeping Function

The systematic process of organizing and maintaining financial documents and records of a company.

Voucher System

A control or accounting system where vouchers (documents that prove a transaction) are used to authorize and record transactions in an accounts payable system.

Account Payable

The liability created by a purchase on account.

Credit Balance

A situation where the sum of credits in an account exceeds the sum of debits, often indicating a liability or revenue.