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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:

Definitions:

Uncovered Interest Parity

A financial theory that posits that the difference in interest rates between two countries is equal to the expected changes in exchange rates between their currencies.

Interest Rates

The price paid by a borrower to a lender for accessing assets, depicted as a proportion of the initial amount.

Purchasing Power Parity

Purchasing power parity (PPP) is an economic theory that compares different countries' currencies through a "basket of goods" approach, suggesting that exchange rates should adjust so that identical goods cost the same in different countries.

Interest Rate Parity

A theory which suggests that the difference in interest rates between two countries is equal to the expected change in exchange rates between their currencies.