Use the Information for the Question(s)below

question 45

Multiple Choice

Use the information for the question(s) below.
Suppose that Rose Industries is considering the acquisition of another firm in its industry for $100 million.The acquisition is expected to increase Rose's free cash flow by $5 million the first year,and this contribution is expected to grow at a rate of 3% every year thereafter.Rose currently maintains a debt to equity ratio of 1,its corporate tax rate is 21%,its cost of debt rD is 6%,and its cost of equity rE is 10%.Rose Industries will maintain a constant debt-equity ratio for the acquisition.
-Rose's unlevered cost of capital is closest to:

• A)8.0%.
• B)7.5%.
• C)7.0%.
• D)9.0%.

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Definitions:

Operating Activities

Activities that relate to the primary operations of a company, such as selling goods and services, which generate revenue and expenses.

Fixed Assets

Long-term tangible assets used in the operations of a business, not expected to be converted to cash within a year.

Current Level

Current level often refers to the present state or condition of a measurable variable, such as production, staffing, or inventory levels.

Financing Activities

Transactions and events where cash is raised or paid back to finance the company's operations, including issuing debt and equity or repaying loans.