Learn and Earn Company Is Financed Entirely by Common Stock

question 64

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. The company wishes to repurchase 50% of the stock and substitutes an equal value of debt yielding 8%. Suppose that before refinancing, an investor owned 100 shares of Learn and Earn common stock. What should he do if he wishes to ensure that risk and expected return on his investment are unaffected by refinancing?

• A) Borrow $3,000 and buy 50 more shares
• B) Continue to hold 100 shares
• C) Sell 50 shares and purchase $3,000 debt (bonds)
• D) None of the above

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Definitions:

Culture

The shared values, beliefs, norms, and practices of a particular group of people, which influence their behavior and perceptions.

Employee Relations

The efforts and strategies employed by an organization to manage the relationship between the employer and employees.

Economic Recession

A significant decline in economic activity spread across the economy, lasting more than a few months.

Social Responsibility

The obligation of individuals, organizations, and businesses to act for the benefit of society at large, often beyond legal or economic requirements.