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:

Med-arb

A hybrid dispute resolution process combining elements of both mediation and arbitration, where a dispute may first be attempted to be resolved through mediation before moving to arbitration.

Arbitration

A method of dispute resolution where a neutral third party makes a binding decision to resolve a conflict outside of court.

Mediation

A form of alternative dispute resolution where a neutral third party helps disputing parties find a mutually acceptable solution.

Dispute Resolution

A process through which disagreements or conflicts are resolved, often involving negotiation, mediation, arbitration, or litigation.