Use the Information for the Question(s)below

question 99

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 $100 million in debt at 5%,what will Rockwood's cost of equity capital be?

• A)11.25%
• B)10.70%
• C)12.50%
• D)12.00%

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Definitions:

Regressive

Describing an action or policy that tends to favor the wealthy or privileged, often at the expense of the less well-off, by reducing progress made in social equality.

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The incorporation or blending of religious beliefs and practices into the cultural and social institutions of a society.

Racial Integration

The process of ending racial segregation and achieving equal participation of races in various aspects of society.

Social Movements

Organized groups that act with continuity and coordination to promote or resist change in society or social institutions.