Health and Wealth Company Is Financed Entirely by Common Stock

question 77

Multiple Choice

Health and Wealth Company is financed entirely by common stock that is priced to offer a 15 percent expected return. If the company repurchases 25 percent of the common stock and substitutes an equal value of debt yielding 6 percent, what is the expected return on the common stock after refinancing? (Ignore taxes.)

• A)18.0 percent
• B)21.0 percent
• C)15.0 percent
• D)10.5 percent

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Definitions:

Mark-up

Added value to the purchasing price of merchandise to include overhead and profit.

Unsold Products

Items or goods that have been manufactured or acquired for sale but have not yet been purchased by customers.

Selling Price

The actual amount a customer pays for a product or service.

Mark-up

A markup on the goods’ purchase cost to account for administrative expenses and profit.