Use the Information for the Question(s) Below

question 17

Multiple Choice

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.
-Following the borrowing of $12 million and the subsequent share repurchase,the equity cost of capital for RC is closest to:

• A) 12%
• B) 9%
• C) 11%
• D) 10%

---

Definitions:

Distribution-free Procedures

Statistical methods that do not require assumptions about the specific distribution of the population from which the sample is drawn.

Non-Normal Procedures

Statistical methods that do not assume the normal distribution of the data and are used for analysis.

One-sample T Statistic

A statistical measure used to test the hypothesis about the mean of a normally distributed population when the population variance is unknown, based on a sample.

Standard Deviation

A measure of the amount of variation or dispersion of a set of values, indicating how spread out the values in a data set are.