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:

Turnover

The ratio of the trading activity of a portfolio to the assets of the portfolio.

Liquidity Betas

A measure of how sensitive an asset's price is to changes in market liquidity, often used in financial modeling to assess the impact of liquidity risk.

Priced Factor

An element affecting the pricing of securities that is reflected in market prices due to its influence on asset returns.

Market Illiquidity

A situation in which an asset cannot be easily sold or exchanged for cash without a substantial loss in value.