Use the Information for the Question(s) Below

question 59

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.
-Prior to any borrowing and share repurchase,the equity cost of capital for RC is closest to:

• A) 20%
• B) 10%
• C) 12%
• D) 9%

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Definitions:

Equal Rights

The principle that all people should have the same rights and opportunities without discrimination.

Thaddeus Stevens

A nineteenth-century U.S. politician and fierce advocate for the abolition of slavery and leader in the effort to implement Reconstruction policies aimed at securing rights for freed slaves.

Civil Rights Bill

The Civil Rights Bill usually refers to legislation aimed at enforcing or furthering civil rights, such as the U.S. Civil Rights Act of 1964 which outlawed discrimination based on race, color, religion, sex, or national origin.

1866

A year marked by significant events such as the passing of the Civil Rights Act in the United States, attempting to protect the rights of African Americans.