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%

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Definitions:

Percentile Score

A statistical value indicating the relative standing of a score within a group, showing what percentage of the group's distribution falls below it.

Confounding Variable

An external variable that influences both the dependent and independent variables in an experiment, potentially skewing the results.

Independent Variable

In experimental research, the variable that is manipulated or changed to observe its effects on the dependent variable.

Dependent Variable

The outcome the researcher is interested in measuring.