Barette Consulting Currently Has No Debt in Its Capital Structure

question 34

Multiple Choice

Barette Consulting currently has no debt in its capital structure, has $500 million of total assets, and its basic earning power is 15%.The CFO is contemplating a recapitalization where it will issue debt at a cost of 10% and use the proceeds to buy back shares of the company's common stock, paying book value.If the company proceeds with the recapitalization, its operating income, total assets, and tax rate will remain unchanged.Which of the following is most likely to occur as a result of the recapitalization?

• A) The ROA would remain unchanged.
• B) The basic earning power ratio would decline.
• C) The basic earning power ratio would increase.
• D) The ROE would increase.
• E) The ROA would increase.

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Definitions:

Carrying Out Duties

The process of executing or performing tasks and responsibilities that are part of a specific job or role.

Statements Made

Statements made refer to expressions or declarations provided by a person, which can be verbal or in writing.

Medical Procedure

A clinical task or operation performed to diagnose, treat, or manage an illness, symptom, or disease.

Surgeon Responsibility

Surgeon responsibility refers to the ethical and professional obligations of a surgeon to provide competent and safe care to patients.