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Ridgefield Enterprises: ROA and ROE

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Ridgefield Enterprises has total assets of $300 million and EBIT of $45 million. The company currently has no debt in its capital structure. The company is contemplating a recapitalization where it will issue debt at 10 percent and use the proceeds to buy back shares of the company's common stock. If the company proceeds with the recapitalization, its operating income, total assets, and tax rate will remain the same. Which of the following will occur as a result of the recapitalization?

a. The company's ROA and ROE will increase
b. The company's ROA and ROE will decrease.
c. The company's ROA will decrease and ROE will increase
d. The company's ROA will increase and ROE will decrease
e. Can't tell without knowing more information.

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Solution provided by:
Ashish Sharma, MBA (IP)
Education
  • MBA (IP), International Center for Internationa Business
  • BBA, University of Rajasthan
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