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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Definitions:

Jacobo Arbenz Guzmán

A Guatemalan military officer and politician who served as the President of Guatemala from 1951 to 1954 and was overthrown by a CIA-backed coup.

Soviet Union

A socialist state that existed from 1922 to 1991, comprised of multiple subnational Soviet republics, with a government based on a one-party system led by the Communist Party.

Military Aid

The provision by a country of military resources, such as weapons, equipment, training, and sometimes troops, to another country to help bolster the latter's defense capabilities.

CIA

The Central Intelligence Agency, a civilian foreign intelligence service of the federal government of the United States tasked with gathering, processing, and analyzing national security information.