Use the information for the question(s) below. Assume that Rose Corporation\'s (

Question

Use the information for the question(s) below. Assume that Rose Corporation's (RC) F.B1T is not expected to grow in the future and that all earnings are paid out as dividends. RC is currently an all equity firm. It expects to generate earnings before interest and taxes (EBIT) of $6 million over the next year. Currently RC has 5 million shares outstanding and its stock is trading for a price of $12.00 per share. RC is considering borrowing $12 million at a rate of 6% and using the proceeds to repurchase shares at the current price of $12.00. Following the borrowing of $12 and subsequent share repurchase, the number of shares that RC will have outstanding is closest to: A. 4.0 million B.6.0 million C. 4.9 million D. 4.5 million

Explanation / Answer

The current number of shares = 5,000,000

The price/share = $12

The borrowing in debt required = 12,000,000

Number of shares to be repurchased = 12,000,000/12 = 1,000,000

So, Number of outstanding shares after repurchase = number of shares before repurchase - Number of shares repurchased

Number of outstanding shares after repurchase = 5,000,000 - 1,000,000 = 4,000,000

So, Answer is 4 Million (Option A)

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