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.