Use the Information for the Question(s)below

question 99

Multiple Choice

Use the information for the question(s) below.
Rockwood Enterprises is currently an all-equity firm and has just announced plans to expand their current business.In order to fund this expansion,Rockwood will need to raise $100 million in new capital.After the expansion,Rockwood is expected to produce earnings before interest and taxes of $50 million per year in perpetuity.Rockwood has already announced the planned expansion,but has not yet determined how best to fund the expansion.Rockwood currently has 16 million shares outstanding and following the expansion announcement these shares are trading at $25 per share.Rockwood has the ability to borrow at a rate of 5% or to issue new equity at $25 per share.
-If Rockwood finances their expansion by issuing $100 million in debt at 5%,what will Rockwood's cost of equity capital be?

• A)11.25%
• B)10.70%
• C)12.50%
• D)12.00%

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Definitions:

Better-than-average Effect

A cognitive bias where individuals overestimate their own qualities and abilities relative to others.

Self-serving Bias

A common tendency for individuals to attribute positive outcomes to their own character but attribute negative outcomes to external factors.

Narcissism

A personality trait characterized by an inflated sense of self-importance, need for admiration, and lack of empathy for others.

Learned Helplessness

A scenario where a person is burdened with feelings of inability to exert control, typically following a harrowing event or successive failures.