Assume that Rose Corporation's (RC) EBIT is not expected to grow in the future and that all

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Assume that Rose Corporation's (RC) EBIT is not expected to grow in the future and that all earnings are paid out as dividends. RC is currently an all-equity firm. It expects to generate earnings before interest and taxes (EBIT) of $6 million over the next year. Currently RC has 5 million shares outstanding and its stock is trading for a price of $12.00 per share. RC is considering borrowing $12 million at a rate of 6% and using the proceeds to repurchase shares at the current price of $12.00.

Following the borrowing of $12 million and subsequent share repurchase, the equity cost of capital for RC is ...?

We have to Use the formula : rE=rU+D/E (rU-rD)

But I don't understand what is D and E and how to calculate them

Posted Date: May 18, 2024 08:08 PM

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Assume that Rose Corporation's (RC) EBIT is not expected to grow in the future and that all

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