Barette Consulting Currently Has No Debt in Its Capital Structure

question 84

Multiple Choice

Barette Consulting currently has no debt in its capital structure, has $500 million of total assets, and its return on invested operating capital (ROIC) is 14.5%.The CFO is contemplating a recapitalization where it will issue debt at a cost of 10% and use the proceeds to buy back shares of the company's common stock, paying book value.If the company proceeds with the recapitalization, its operating income, total assets, and tax rate will remain unchanged.Which of the following is most likely to occur as a result of the recapitalization?

• A) The ROA would remain unchanged.
• B) The ROIC would decline.
• C) The ROIC would increase.
• D) The ROE would increase.
• E) The ROA would increase.

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Definitions:

Treasury

A government department responsible for managing the finances, revenue, and economic policy of a country.

Majority Shareholder

An individual or entity that owns more than fifty percent of a company's shares, giving them significant control over the company.

Minority Shareholders

Owners of a smaller portion of a company's shares, who have limited control or power over corporate decisions compared to majority shareholders.

Self-Dealing

An unethical business practice where an individual takes advantage of their position in a transaction for personal benefit, often at the expense of the interests of others.