Smith and T Co. currently is financed with 10% debt and 90% equity. However, its

Question

Smith and T Co. currently is financed with 10% debt and 90% equity. However, its CFO has proposed that the firm ssue new long-term debt and repurchase some of the firm's common stock. Its advisers believe that the long-term debt would require a before-tax yield of 10%, while the firm's basic earning power is 14%. The firm's operating income and total assets will not be affected. The CFO has told the rest of the management team that he berileves this move will increase the firm's stock price. If Smith and T Co. proceeds items are also likely to increase? Check all that apply. with the recapitalization, which of the following Return on assets (ROA) Cost of debt (ra) Net income Basic earning power (BEP) Cost of equity (%) DOLL

Explanation / Answer

Total Assets and EBIT doesn't change hence but net income decreases due to extra interest payment.
ROA decreases beacuse net income decreases. BEP which is EBIT/Total Assets remains same.

Cost of debt increases with higher debt ratio as business is more risky.
Cost of equity also increases

Best of Luck. God Bless

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