Biddle Publishing currently is financed with 10% debt and 90% equity. However, B

Question

Biddle Publishing currently is 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 move will increase the firm's stock price. If Biddle proceeds with the recapitalization, which of the following items is also likely to increase? Cost of equity (rs) Return on assets (ROA) Basic earning power (BEP) Net income Return on equity (ROE)

Explanation / Answer

ROA

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