Question

Walton Clinic, with $30 million in assets, currently uses no debt financing. It earns a 15 percent return on those assets (basic earnings power). It plans to issue new debt at an interest rate of 10 percent and use the proceeds to repurchase some of its common stock. Which of the following will occur as a result of the recapitalization?The return on assets (ROA) will decline.The return on equity (ROE) will increase.The cost of equity will increase.Statements a., b., and c. will occur.None of the statements (a., b., or c.) will occur.

Answer 1

None of the statements (a., b., or c.) will occur

Step-by-step explanation:

given data

assets = $30 million

earn return = 15 %

interest rate = 10 %

solution

as we now that ROA is probability ratio

and formula for ROA is

ROP =
`(net income)/(tatal value of assest)`

and

return on equity (ROE ) is as profitability ratio

formula for ROE is

ROE =
`(net income)/(tatal value of common equity)`

so here issue of debit & repurchase of stock not chnage in value of total liability and equity

so value of total assets not chnage

but interest expenses on debit will decrease amount of net income

so transaction ROA decline and transaction ROE is increase

so equity cost will be increase

so here correct option last None of the statements (a., b., or c.) will occur