Learn and Earn Company Is Financed Entirely by Common Stock

question 53

Multiple Choice

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)$12.00
• B)$19.20
• C)$24.00
• D)$15.60

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Definitions:

Utility Function

A mathematical representation describing how a consumer ranks different bundles of goods according to levels of satisfaction.

Risk Averse

A preference for guaranteed outcomes over those with uncertainty, even if the uncertain outcomes might offer a higher expected return.

Coin-Flip Bet

A gambling proposition where the outcome is determined by the flip of a coin, representing a 50/50 chance of winning or losing.

Wealth

The abundance of valuable financial assets or physical possessions which can be converted into a form that can be used for transactions.