Blueline Publishers Is Considering a Recapitalization Plan

question 64

Multiple Choice

Blueline Publishers is considering a recapitalization plan.It is currently 100% equity financed but under the plan it would issue long-term debt with a yield of 9% and use the proceeds to repurchase common stock.The recapitalization would not change the company's total assets,nor would it affect the firm's basic earning power,which is currently 15%.The CFO believes that this recapitalization would reduce the WACC and increase stock price.Which of the following would also be likely to occur if the company goes ahead with the recapitalization plan?

• A) The company's earnings per share would decline.
• B) The company's cost of equity would increase.
• C) The company's ROA would increase.
• D) The company's ROE would decline.
• E) The company's net income would increase.

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Definitions:

Formation Of Contract

The legal process by which an agreement between parties becomes legally enforceable, usually involving offer, acceptance, consideration, and mutual intent.

Offer And Acceptance

The fundamental components of a contract where one party makes an offer and the other accepts, creating a legally binding agreement.

Consideration

A value (such as money, service, or goods) exchanged between parties in a contract, making the agreement legally binding.

Fairness

The quality of being impartial, just, and equitable in decisions and actions.