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:

Pure Monopoly

A market structure where a single company or entity has exclusive control over the production and sale of a particular product or service.

Competitive Market

An economic market in which numerous producers compete against each other to satisfy the wants and needs of a large number of consumers.

Pure Monopoly

A pure monopoly occurs when a single company or entity is the sole provider of a particular product or service in a market, with no close substitutes.

Oligopolistic Competition

A market structure characterized by a small number of firms dominating the market, leading to limited competition and high barriers to entry for new competitors.