Blemker Corporation Has $500 Million of Total Assets, Its Basic

Multiple Choice

Blemker Corporation has $500 million of total assets, its basic earning power is 15%, and it currently has no debt in its capital structure.
The CFO is contemplating a recapitalization where it will issue debt at a cost of 10% and use the proceeds to buy back shares of the company's common stock, paying book value. If the company proceeds with the recapitalization, its operating income, total assets, and tax rate will remain unchanged. Which of the following is most likely to occur as a result of the recapitalization?

A) The ROA would increase.
B) The ROA would remain unchanged.
C) The basic earning power ratio would decline.
D) The basic earning power ratio would increase.
E) The ROE would increase.