Use the Information for the Question(s) Below

question 3

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 value of a share for RC is closest to:

• A) $14.00
• B) $13.20
• C) $12.00
• D) $10.80

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Definitions:

Maximum Price

The highest price that a trader, investor, or consumer is willing to pay for a security or good.

Required Rate

The minimum expected rate of return on an investment, set by investors based on risk levels and economic conditions.

Expected Growth Rate

The projected rate at which a company's earnings or revenue are anticipated to grow.

Annual Dividend

The total dividend payment a shareholder receives from a company in one year, based on the company's dividend distribution policy.