Business & Finance Assignment | Custom Assignment Help

25.Your firm has $500 million of investor-supplied capital, its return on investors’ capital (ROIC) is 15%, and itcurrently has no debt in its capital structure (i.e., wd = 0). The CFO is contemplating a recapitalization where it would issue debt at an after-tax cost of 10% and use the proceeds to buy back some of its common stock, such that the percentage of common equity in the capital structure (wc) is 1 – wd. If the company goes ahead with the recapitalization, its operating income, the size of the firm (i.e., total assets), total investor-supplied capital, and tax rate would remain unchanged. Which of the following is most likely to occur as a result of the recapitalization?

• The ROE would increase.
• The ROA would remain unchanged.
• The return on investors’ capital would decline.
• The ROA would increase.
• The return on investors’ capital would increase.