Health and Wealth Company Is Financed Entirely by Common Stock

question 35

Multiple Choice

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

• A) 18%
• B) 21%
• C) 15%
• D) None of the above

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