BB Is Considering Moving to a Capital Structure That Is

question 13

Multiple Choice

BB is considering moving to a capital structure that is comprised of 20% debt and 80% equity, based on market values. The debt would have an interest rate of 7%. The new funds would be used to repurchase stock. It is estimated that the increase in risk resulting from the additional
Leverage would cause the required rate of return on equity to rise to
14%) If this plan were carried out, what would BB's new value of operations be?

• A)
• $498,339
• B) $512,188
• C) $525,237
• D) $540,239
• E) $590,718

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Definitions:

Net Present Value

A financial metric that calculates the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

Dollar Amount

Indicates a specific value of money, usually in U.S. dollars, mentioned in financial transactions, budgets, and pricing.

Minimax Strategy

A decision-making strategy, especially in game theory, aiming to minimize the possible loss for a worst case (maximum loss) scenario.

Largest Cost

Refers to the highest expense in either a specific project or operation typically identified to assess and reduce financial outlays.