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:

Targeted Rates

Interest rates or inflation rates that central banks aim for to control economic variables like inflation and unemployment.

Tax System

The organized structure and set of rules under which taxes are collected by a government from individuals and businesses.

Incentivize

Incentivize refers to the practice of offering rewards or incentives to encourage certain behaviors or actions.

Balance Sheet

A report detailing a corporation's assets, liabilities, and equity held by shareholders at a particular moment.