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:

Online Movie Rentals

A service that allows consumers to rent movies digitally over the internet for a limited period.

Price of Movie Tickets

The amount of money charged for admission to a movie screening.

Substitute

An alternative product or service that consumers can turn to if the original product or service becomes unavailable or too expensive.

Ambiguous Effect

An ambiguous effect refers to an outcome or result that is unclear or can have multiple interpretations, often leading to uncertain impacts in economic analyses.