Use the Information for the Question(s) Below

question 24

Multiple Choice

Use the information for the question(s) below.
Assume that Rose Corporation's (RC) EBIT is not expected to grow in the future and that all earnings are paid out as dividends. RC is currently an all equity firm. It expects to generate earnings before interest and taxes (EBIT) of $6 million over the next year. Currently RC has 5 million shares outstanding and its stock is trading for a price of $12.00 per share. RC is considering borrowing $12 million at a rate of 6% and using the proceeds to repurchase shares at the current price of $12.00.
-Following the borrowing of $12 million and the subsequent share repurchase,the number of shares that RC will have outstanding is closest to:

• A) 4.0 million
• B) 6.0 million
• C) 4.9 million
• D) 4.5 .million

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Definitions:

Profit

The profit achieved when the revenue from a business operation is greater than the expenses, costs, and taxes required for the operation.

Treasury Bond

Debt obligation of the federal government with original maturity between 10 and 30 years.

Liquidate

To convert assets into cash or cash equivalents by selling them on the market.

Spot Price

The current market price at which a particular asset, such as a commodity, currency, or security, can be bought or sold for immediate delivery.