Health and Wealth Company Is Financed Entirely by Common Stock

question 40

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)18.0%
• B)21.0%
• C)15.0%
• D)10.5%

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Definitions:

Cash Cycle

The cash cycle measures the time it takes for a company to convert its inventory and other resources into cash flows from sales, indicating the efficiency of a company's cash management.

First Quarter

Typically refers to the first three months of a financial year, used as a reporting period by businesses and other organizations.

Operating Cycle

The duration between a company's purchase of inventory and the receipt of cash from accounts receivable, reflecting the efficiency of a company's cash flow.

Inventory

refers to the goods and materials a business holds for the ultimate goal of resale or production.