Use the Information for the Question(s)below

question 79

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)11%.
• B)10%.
• C)12%.
• D)9%.

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Definitions:

Confounding Variable

An extraneous variable in an experimental design that correlates with both the dependent and independent variables, potentially leading to a false assumption of causality.

Experimental Approach

A research method involving the manipulation of variables to observe and measure the effects on subjects in a controlled setting.

Manipulation of Variable

The process in experimental research of changing one variable to determine if changes in one variable cause changes in another variable.

Confounds

Variables that obscure the clear understanding of the relationship between different variables in a study, due to their intertwined effects.