Use the Information for the Question(s)below

question 33

Multiple Choice

Use the information for the question(s) below.
Rockwood Enterprises is currently an all-equity firm and has just announced plans to expand their current business.In order to fund this expansion,Rockwood will need to raise $100 million in new capital.After the expansion,Rockwood is expected to produce earnings before interest and taxes of $50 million per year in perpetuity.Rockwood has already announced the planned expansion,but has not yet determined how best to fund the expansion.Rockwood currently has 16 million shares outstanding and following the expansion announcement these shares are trading at $25 per share.Rockwood has the ability to borrow at a rate of 5% or to issue new equity at $25 per share.
-If Rockwood finances their expansion by issuing new stock,what will Rockwood's cost of equity capital be?

• A)12%
• B)15%
• C)8%
• D)10%

---

Definitions:

Aptitude Test

An examination designed to measure a person's ability or potential to succeed in a particular activity or area of knowledge.

Pilot Training Programme

A structured educational curriculum designed to teach individuals how to operate aircraft safely and effectively.

Achievement Test

A standardized test that measures an individual's current knowledge or skill level in a particular domain.

Intelligence Test

An examination designed to measure cognitive abilities and potential to understand and process information.