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:

Bundles

Combinations of goods and services offered together as a single package, often at a discounted price.

Weak Axiom

A principle in consumer theory that if a consumer prefers bundle A over bundle B when both are affordable, they will not choose B over A when income or prices change, holding everything else constant.

Strong Axiom

Often refers to the strong axiom of revealed preference in economics, a principle used to infer a consumer's complete preference ordering over goods.

Revealed Preference

A theory suggesting that the preferences of consumers can be understood from their purchasing habits and choices.