Use the Information for the Question(s)below

question 74

Multiple Choice

Use the information for the question(s) below.
Assume that Rose Corporation's (RC) EBIT is not expected to grow in the future and that all earnings are paid out as dividends.RC is currently an all-equity firm.It expects to generate earnings before interest and taxes (EBIT) of $6 million over the next year.Currently RC has 5 million shares outstanding and its stock is trading for a price of $12.00 per share.RC is considering borrowing $12 million at a rate of 6% and using the proceeds to repurchase shares at the current price of $12.00.
-Following the borrowing of $12 million and subsequent share repurchase,the expected earnings per share for RC is closest to:

• A)$1.32.
• B)$1.44.
• C)$1.40.
• D)$1.20.

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Definitions:

Instrument

An instrument is a legal document that formally records or grants a right, like contracts, wills, or deeds.

Drawer

The person who writes or issues a cheque or draft, instructing his or her bank to pay a specified sum of money to a named party.

Draft

An initial version of a document, plan, or proposal that is subject to revision or editing.

Drawee

The party in a financial transaction, such as a check or draft, upon whom the order to pay is made; typically a bank.