Use the Information for the Question(s) Below

question 6

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.
-One of the reasons cited as a contributing factor in the financial meltdown of 2008 was the very high leverage ratios of major banking institutions. Which of the following outcomes would NOT occur if bank leverage were reduced?

• A) Lower leverage would make over-all bank financing more expensive.
• B) With a drop in asset value, insolvency would be less likely to occur.
• C) A decrease in leverage would result in lower return on equity.
• D) A decrease in leverage would decrease the riskiness of the bank's equity.

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Definitions:

Peer Pressures

The influence that individuals exert on others in their peer group, often encouraging them to adopt certain behaviors, values, or attitudes.

Public Health Approach

A multidisciplinary method aimed at preventing disease and promoting health through organized efforts and informed choices of society, organizations, communities, and individuals.

Tertiary Prevention

Strategies aimed at managing and reducing the impact of an ongoing illness or injury to prevent further deterioration or complications.

Prevention Programs

Initiatives or interventions designed to reduce the risk of developing certain health issues, diseases, or disorders before they occur.