Refer to Exhibit 15

question 37

Multiple Choice

Refer to Exhibit 15.1.PP is considering changing its capital structure to one with 30% debt and 70% equity, based on market values.The debt would have an interest rate of 8%.The new funds would be used to repurchase stock.It is estimated that the increase in risk resulting from the added leverage would cause the required rate of return on equity to rise to 12%.If this plan were carried out, what would be PP's new value of operations?

• A) $484, 359
• B) $487, 805
• C) $521, 173
• D) $560, 748
• E) $584, 653

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Definitions:

Social Identity Theory

A psychological theory that posits individuals derive part of their self-concept from their perceived membership in a relevant social group, influencing their behavior and attitudes.

Self-Fulfilling Prophecy

A prediction that directly or indirectly causes itself to become true due to positive feedback between belief and behavior.

Non-Verbal Cues

Forms of communication without words, such as gestures, facial expressions, posture, and tone of voice, which can convey a wide range of messages.

Self-Fulfilling Prophecy

A psychological phenomenon whereby an individual's or group's belief or expectation brings about its own realization, influencing their behavior to make the prediction come true.