Volga Publishing Is Considering a Proposed Increase in Its Debt

question 47

Multiple Choice

Volga Publishing is considering a proposed increase in its debt ratio, which would also increase the company's interest expense. The plan would involve issuing new bonds and using the proceeds to buy back shares of its common stock. The company's CFO thinks the plan will not change total assets or operating income, but that it will increase earnings per share (EPS) . Assuming the CFO's estimates are correct, which of the following statements is CORRECT?

• A) Since the proposed plan increases Volga's financial risk, the company's stock price still might fall even if EPS increases.
• B) If the plan reduces the WACC, the stock price is also likely to decline.
• C) Since the plan is expected to increase EPS, this implies that net income is also expected to increase.
• D) If the plan does increase the EPS, the stock price will automatically increase at the same rate.
• E) Under the plan there will be more bonds outstanding, and that will increase their liquidity and thus lower the interest rate on the currently outstanding bonds.

---

Definitions:

Wage Discrimination

The practice of paying different wages to employees who perform similar jobs, based on non-job-related factors like gender, race, or age.

Efficiency Wage

A wage set above the market equilibrium to increase productivity by encouraging higher effort or reducing turnover among employees.

Positive Amount of Unemployment

A situation where there is a nonzero level of unemployment in the economy, often considered normal due to frictions and transitions in the job market.

Market-clearing Wage

The wage rate at which the quantity of labor supplied equals the quantity of labor demanded.