Learn and Earn Company Is Financed Entirely by Common Stock

question 53

Multiple Choice

Learn and Earn Company is financed entirely by common stock that is priced to offer a
20% expected rate of return. The stock price is $60 and the earnings per share are $12. If the company repurchases 50% of the stock and substitutes an equal value of debt yielding 8%, what is the expected earnings per share value after refinancing?

• A) $12.00
• B) $19.20
• C) $24.00
• D) None of the above

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Definitions:

Homogeneous Product

A product that cannot be distinguished from competing products from different suppliers.

Differentiated Product

A product that is made distinct from similar products offered by competitors through unique features, quality, branding, or other attributes.

Monopolistic Competitor's

A market structure where many firms sell products that are similar but not identical, each having some control over its price due to product differentiation.

Long-run Demand Curve

A graphical representation that shows the quantities of a product or service consumers are willing to purchase at different prices over a period where all production factors can vary.