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problem: Ridgefield Enterprises has total assets of 300 million dollar. The company currently has no debt in its capital structure. The firm basic earning power is 15%. The firm is contemplating a recapitalization where it will issue debt at 10% and use the proceeds to buy back shares of the firm's common stock. If the firm proceeds with the recapitalization, its operating income, total assets, & tax rate will remain the same. Which of the following will occur as a result of the recapitalization?

[A]     The firm's ROA will decline.

[B]     The firm's ROE will increase.

[C]     The firm's basic earning power will decline.

[D]     Answers A and B are correct.

[E]     All of the above answers are correct.

Basic Finance, Finance

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