Reynolds Resorts 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 common stock.The recapitalization would not change the company's total assets,nor would it affect the firm's basic earning power,which is currently 15%.The CFO believes that this recapitalization would reduce the WACC and increase stock price.What would also be likely to occur if the company goes ahead with the recapitalization plan?
A)The company's net income would increase.
B)The company's earnings per share would decline.
C)The company's cost of equity would increase.
D)The company's ROE would decline.

Question

Quizplus · Accepted Answer

The cost of equity would likely increase after the recapitalization due to the increased financial risk from the added debt.

Reynolds Resorts Is Currently 100% Equity Financed