15. Company Z is financed entirely by common stock that is priced to offer a 15 percent...
Question:
15. Company Z is financed entirely by common stock that is priced to offer a 15 percent expected return. The common stock price is $40/share. The earnings per share (EPS) is expected to be $6. If the company repurchased 25 percent of the common stock by issuing an equal value of debt yielding 6 percent, what would be the expected value of earnings per share after refinancing? (Ignore taxes.) (For simplicity you can assume the firm has a single "divisible" share outstanding. So the re-financing affects both the earnings, due to interest expenses ("numerator"), and the number of outstanding shares ("denominator"). Think how much needs to be borrowed to repurchase 25% of the share and thus how much interest needs to be paid per period).
A. $6
B. $7.52
C. $7.20
D. $6.90