Learn and Earn Company is financed entirely by common stock that is priced to offer a 20% expected rate of return.The stock price is $60 and the earnings per share are $12.If the company repurchases 50% of the stock and substitutes an equal value of debt yielding 8%,what is the expected earnings per share value after refinancing?
A)$12.00
B)$19.20
C)$24.00
D)$15.60

Question

Quizplus · Accepted Answer

The correct answer is B. The expected earnings per share value after refinancing is $19.20. This is because the company will have fewer shares outstanding after the stock repurchase, and the debt will have a lower interest rate than the stock, so the company will have more earnings available to distribute to shareholders.

Learn and Earn Company Is Financed Entirely by Common Stock