Daylight Solutions Is Considering a Recapitalization That Would Increase Its

question 50

Multiple Choice

Daylight Solutions is considering a recapitalization that would increase its debt ratio and increase its interest expense.The company would issue new bonds and use the proceeds to buy back shares of its common stock.The company's CFO thinks the plan will not change total assets or operating income, but that it will increase earnings per share (EPS) .Assuming the CFO's estimates are correct, which of the following statements is CORRECT?

• A) If the plan reduces the WACC, the stock price is also likely to decline.
• B) Since the plan is expected to increase EPS, this implies that net income is also expected to increase.
• C) If the plan does increase the EPS, the stock price will automatically increase at the same rate.
• D) Under the plan there will be more bonds outstanding, and that will increase their liquidity and thus lower the interest rate on the currently outstanding bonds.
• E) Since the proposed plan increases Daylight's financial risk, the company's stock price still might fall even if EPS increases.

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Definitions:

Defence Mechanism

Psychological strategies unconsciously used to protect oneself from anxiety and unacceptable thoughts and feelings.

Regression

A defense mechanism leading an individual to revert to a previous phase of psychological development, often under stress or frustration.

Reprimanded

Officially warned or punished, usually in a professional or formal context, for a wrongdoing or mistake.

Defence Mechanism

Mental tactics used subconsciously to shield an individual from distress caused by intolerable ideas or emotions.