Wealth and Health Company Is Financed Entirely by Common Stock

Multiple Choice

Wealth and Health Company 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 repurchases 25 percent of the common stock and substitutes an equal value of debt yielding 6 percent, what is the expected value of earnings per share after refinancing? (Ignore taxes.)

A) $6.00
B) $7.52
C) $7.20
D) $6.90