Learn and Earn Company Is Financed Entirely by Common Stock

question 48

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 this refinancing?

• A)Borrow $3,000 and buy 50 more shares.
• B)Continue to hold 100 shares.
• C)Sell 50 shares and purchase $3,000 of 8% debt (bonds).
• D)Sell 8% of his stock and invest in bonds.

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Definitions:

Conflict Resolution

The process of resolving a dispute or disagreement between two or more parties in a constructive manner.

Smoothing

In conflict resolution, smoothing refers to an approach that emphasizes agreement and minimizes disagreement to reach a harmonious outcome.

Superordinate Goals

Goals that are shared and require cooperative efforts from individuals or groups that might otherwise have individual or conflicting objectives.

Compromise

An agreement or a settlement of a dispute that is reached by each side making concessions.