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:

NLRB Certification

The official recognition by the National Labor Relations Board that a labor union is the authorized representative of a group of employees for collective bargaining purposes.

Employee Free Choice Act

Proposed U.S. legislation intended to ease the process for employees to form, join, or assist labor unions and to provide for mandatory injunctions for unfair labor practices during organizing efforts.

Authorization Cards

Cards signed by employees to indicate their wish to have a union represent them for collective bargaining purposes.

Nonunion Workers

Employees who are not members of a labor union and therefore do not receive the benefits of collective bargaining or labor union protections.