Question: Barette Consulting currently has no debt in its capital structure, has $500 million of total assets, and its basic earning power is 15%. The CFO is contemplating a recapitalization where it will issue debt at a cost of 10% and use the proceeds to buy back shares of the company's common stock, paying book value. If the company proceeds with the recapitalization, its operating income, total assets, and tax rate will remain unchanged. Which of the following is most likely to occur as a result of the recapitalization? a. The ROA would remain unchanged. b. The basic earning power ratio would decline. c. The basic earning power ratio would increase. d. The ROE would increase. e. The ROA would increase.
Question: Barette Consulting currently has no debt in its capital structure, has $500 million of total assets, and its basic earning power is 15%. The CFO is contemplating a recapitalization where it will issue debt at a cost of 10% and use the proceeds to buy back shares of the company's common stock, paying book value. If the company proceeds with the recapitalization, its operating income, total assets, and tax rate will remain unchanged. Which of the following is most likely to occur as a result of the recapitalization? a. The ROA would remain unchanged. b. The basic earning power ratio would decline. c. The basic earning power ratio would increase. d. The ROE would increase. e. The ROA would increase.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Barette Consulting currently has no debt in its
capital structure, has $500 million of total assets,
and its basic earning power is 15%. The CFO is
contemplating a recapitalization where it will issue
debt at a cost of 10% and use the proceeds to buy
back shares of the company's common stock,
paying book value. If the company proceeds with
the recapitalization, its operating income, total
assets, and tax rate will remain unchanged. Which
of the following is most likely to occur as a result of
the recapitalization?
a. The ROA would remain unchanged.
b. The basic earning power ratio would decline.
c. The basic earning power ratio would increase.
d. The ROE would increase.
e. The ROA would increase.
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