Reynolds Resorts Is Currently 100% Equity Financed

question 42

Multiple Choice

Reynolds Resorts is currently 100% equity financed.The CFO is considering a recapitalization plan under which the firm would issue long-term debt with a yield of 9% and use the proceeds to repurchase common stock.The recapitalization would not change the company's total assets,nor would it affect the firm's basic earning power,which is currently 15%.The CFO believes that this recapitalization would reduce the WACC and increase stock price.What would also be likely to occur if the company goes ahead with the recapitalization plan?

• A)The company's net income would increase.
• B)The company's earnings per share would decline.
• C)The company's cost of equity would increase.
• D)The company's ROE would decline.

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Definitions:

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A graphical representation of the distribution of a dataset that uses lines connecting points representing the frequencies of respective values.

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