Suppose That Rearden Metal Currently Has No Debt and Has

question 70

Multiple Choice

Suppose that Rearden Metal currently has no debt and has an equity cost of capital of 12%.Rearden is considering borrowing funds at a cost of 6% and using these funds to repurchase existing shares of stock.Assume perfect capital markets.If Rearden borrows until they achieved a debt-to-equity ratio of 50%,then Rearden's levered cost of equity would be closest to:

• A)10.0%.
• B)12.0%.
• C)15.0%.
• D)16.0%.

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Definitions:

Operating Cycle

The average time period between purchasing goods for inventory and receiving cash from selling those goods.

Accounts Receivables

Sums due to a company from its customers for products or services rendered but not yet compensated for.

Investing Activity

Operations concerning the buying and selling of long-term assets and other financial investments that do not qualify as cash equivalents.

Suppliers

Entities or individuals that provide goods or services to another entity or individual, usually in a business-to-business context.