Refer to Exhibit 15

question 26

Multiple Choice

Refer to Exhibit 15.3.BB is considering moving to a capital structure that is comprised of 20% debt and 80% equity, based on market values.The debt would have an interest rate of 7%.The new funds would be used to repurchase stock.It is estimated that the increase in risk resulting from the additional leverage would cause the required rate of return on equity to rise to 14%.If this plan were carried out, what would BB's new value of operations be?

• A) $498, 339
• B) $512, 188
• C) $525, 237
• D) $540, 239
• E) $590, 718

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Definitions:

Floating-Rate Debt

A type of debt instrument or loan whose interest payment varies with market interest rates.

Fixed-Rate Debt

A loan or security that has an interest rate that remains constant throughout the life of the loan, providing predictable repayment schedules.

Option Contract

A contract which gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a certain date.