Question about recapitalization

Reference no: EM1368699

Cronwell Enterprises has total assets of $300 million. The company currently has no debt in its capital structure. The company's basic earning power is 15 percent. The company is contemplating a recapitalization where it will issue debt at 10 percent and use the proceeds to buy back shares of the company's common stock. If the company proceeds with the recapitalization its operating income, total assets, and tax rate will remain the same. Which of the following will occur as a result of the recapitalization?

a. The companys ROA will decline.
b. The companys ROE will increase.
c. The companys basic earning power will decline.
d. Statements a and b are correct.
e. All of the statements above are correct

Reference no: EM1368699

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