Volga Publishing Is Considering a Proposed Increase in Its Debt

question 3

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 share price still might fall even if EPS increases.
• B)If the plan reduces the WACC, the share 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 share price will automatically increase at the same rate.

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Definitions:

Cash Balance

The amount of cash or cash equivalents that a company or individual has readily available.

Market Rate Of Return

The average rate of return on investment that is expected by investors in the market, typically based on historical data.

Replenishes

Refers to the process of filling up or restoring inventory or supplies to their optimal levels.

Optimal

The most favorable condition or level of efficiency that a system, selection, or outcome can achieve under given constraints.