Use the Information for the Question(s)below

question 11

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 number of shares that RC will have outstanding is closest to:

• A)4.0 million.
• B)6.0 million.
• C)4.9 million.
• D)4.5 million.

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Definitions:

Profitable Projects

Projects that generate a financial gain or benefit exceeding their costs and investments.

Investment Centres

Divisions or units within an organization that are responsible for generating returns on the assets invested in them.

Residual Income

The amount of net income left over for a business after it has paid out dividends to its shareholders, often used as a measure of corporate and project profitability.

Investment Turnover

A financial ratio comparing the sales revenue a company generates to its current investment in assets, indicating efficiency in using investments to produce sales.