Your firm is currently 100% equity financed. The CFO is considering a recapitali

Question

Your firm is currently 100% equity financed. The CFO is considering a recapitalization plan under which the firm would issue long-term debt with a yield of 9% and use the proceeds to repurchase some of its common stock. The recapitalization would not change the companies total assets, nor would it affect the firms basic earning power which is 15%. The CFO believes that this recapitalization would reduce the firms WACC and increase its stock price. Which of the following would likely occur if the company goes ahead with the recapitalization plan,

The company's net income would increase.

The Company's earnings per share would increase.

The Company's ROE would Decline.

THe Company's Cost of Equity would decline. '

The Company's ROA would increase.

Explanation / Answer

the companys EPS is going to increase because yield on debt is < than earnings power, This going to cause the decrease in EPS (due to interest payment on debt) to be lower than decrease is number of outstanding shares du to share repurchase

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