Barette Consulting Currently Has No Debt in Its Capital Structure,has

question 27

Multiple Choice

Barette Consulting currently has no debt in its capital structure,has $500 million of total assets,and its basic earning power is 15%.The CFO is contemplating a recapitalization where it will issue debt at a cost of 10% and use the proceeds to buy back shares of the company's common stock,paying book value.If the company proceeds with the recapitalization,its operating income,total assets,and tax rate will remain unchanged.Which of the following is most likely to occur as a result of the recapitalization?

• A) The ROA would remain unchanged.
• B) The basic earning power ratio would decline.
• C) The basic earning power ratio would increase.
• D) The ROE would increase.
• E) The ROA would increase.

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Definitions:

Processes Of Conformity

The psychological mechanisms through which individuals align their attitudes, beliefs, and behaviors with those of a group.

Explicit Attitudes

Attitudes that are consciously recognized and expressed by individuals.

Culturally Defined

Characteristics or norms that are identified and accepted by a particular society or group based on shared values and beliefs.

Cultural Scripts

Normative guidelines for behavior and understanding in various social contexts that are learned and shared within a cultural or social group.