Wealth and Health Company Is Financed Entirely by Common Stock

question 66

Multiple Choice

Wealth and Health Company is financed entirely by common stock that is priced to offer a
15% expected return. The common stock price is $40/share. The earnings per share (EPS) is expected to be $6. If the company repurchases 25% of the common stock and substitutes an equal value of debt yielding 6%, what is the expected value of earnings per share after refinancing? (Ignore taxes.)

• A) $6.00
• B) $7.52
• C) $7.20
• D) None of the above