Use the Information for the Question(s)below

question 92

Essay

Use the information for the question(s)below.
Assume that Rose Corporation's (RC)EBIT is not expected to grow in the future and that all earnings are paid out as dividends.RC is currently an all-equity firm.It expects to generate earnings before interest and taxes (EBIT)of $6 million over the next year.Currently RC has 5 million shares outstanding and its stock is trading for a price of $12.00 per share.RC is considering borrowing $12 million at a rate of 6% and using the proceeds to repurchase shares at the current price of $12.00.
-Show mathematically that the stock price of RC won't change following the debt issuance and share repurchase.

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Definitions:

Machining

A manufacturing process involving the shaping of metal or other materials using machines such as lathes, milling machines, and grinders.

Finishing

Refers to the final process in manufacturing or production, where products are completed, treated, or coated to meet quality and design specifications.

Manufacturing Overhead

Indirect factory-related costs that are incurred when a product is manufactured, such as utilities and salaries for maintenance workers.

Predetermined Overhead Rates

A calculated rate used to apply manufacturing overhead costs to products based on expected costs and activity levels.