Learn and Earn Company Is Financed Entirely by Common Stock

Multiple Choice

Learn and Earn Company is financed entirely by common stock that is priced to offer a 20 percent expected rate of return. The stock price is $60 and the earnings per share are $12. The company wishes to repurchase 50 percent of the stock and substitutes an equal value of debt yielding 8 percent. Suppose that before refinancing, an investor owned 100 shares of Learn and Earn common stock. What should he do if he wishes to ensure that risk and expected return on his investment are unaffected by this refinancing?

A) Borrow $3,000 and buy 50 more shares.
B) Continue to hold 100 shares.
C) Sell 50 shares and purchase $3,000 of 8 percent debt (bonds) .
D) Sell 8 percent of his stock and invest in bonds.