Dye Industries Currently Uses No Debt,but Its New CFO Is

question 29

Multiple Choice

Dye Industries currently uses no debt,but its new CFO is considering changing the capital structure to 40.0% debt (w_d) by issuing bonds and using the proceeds to repurchase and retire common shares so the percentage of common equity in the capital structure (w_c) = 1 − w_d.Given the data shown below,by how much would this recapitalization change the firm's cost of equity,i.e.,what is r_L − r_U?

• A)1.66%
• B)1.84%
• C)2.02%
• D)2.23%
• E)2.45%

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Definitions:

Leverage Ratio

A financial metric used to assess a company's ability to meet its financial obligations, calculated as the ratio of its total debt to its equity, assets, or other benchmarks.

Bank Capital

The financial resources held by a bank that acts as a cushion against potential losses, consisting of equity, retained earnings, and other reserves.

Assets

Resources owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.

Discount Rate

The interest rate charged to commercial banks and other depository institutions on loans received from the central bank's discount window.