Learn and Earn Company is financed entirely by common stock that is priced to offer a 20 percent expected rate of return.The stock price is $60 and the earnings per share are $12.If the company repurchases 50 percent of the stock and substitutes an equal value of debt yielding 8 percent, what is the expected earnings per share value after refinancing?
A)$12
B)$19.20
C)$24
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 calculated by multiplying the current earnings per share of $12 by the factor (1 - (50% * (1 - (8% / 20%)))). This factor represents the proportion of earnings that will be available to common shareholders after the refinancing.

Learn and Earn Company Is Financed Entirely by Common Stock