Health and Wealth Company Is Financed Entirely by Common Stock

Multiple Choice

Health and Wealth Company is financed entirely by common stock that is priced to offer a 15 percent expected return. If the company repurchases 25 percent of the common stock and substitutes an equal value of debt yielding 6 percent, what is the expected return on the common stock after refinancing? (Ignore taxes.)

A) 18.0 percent
B) 21.0 percent
C) 15.0 percent
D) 10.5 percent