The effect of financial leverage Biddle publishing currently financed with 10% d

Question

The effect of financial leverage Biddle publishing currently financed with 10% debt and 90% equity, However, Biddle's CFO has proposed that the firm issue new long-term debt and repurchase some of the firm's common stock. Biddle's advisors believe the long-term debt would require a before-tax yield of 10%, while the firm's basic earning power (BEP) 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 believes this movie will increase the firm's stock price. If Biddle proceeds with the recapitalization, which of the following items is also likely to increase? Net income Basic earning power (BEP) Cost of debt (rd) Cost of equality (rs) Return on assets (ROA) The CFO's proposal has opened up a dialogue among the company's management team about the effects of debt financing in particular, one notes that debt financing is cheaper than equity financing. He suggests that using more debt always will decrease the firm's weighted average cost of capital (WACC). Is this true? Yes No

Explanation / Answer

1.net income 2.no

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