1. Target generates EBIT of $100 million every year. Assume that its investments in fixed assets and net working capital are equal to its depreciation expenses every year. Target is fincanced with all equity. It has 100 million shares outstanding that each sell for $25. If Target buys back 50 million shares by becoming leveraged, what is the new share price? The corporate tax rate is 40%.

2. How does arithmetic return relate to its geometric mean return?

a. The arithmetic mean return does not have any usefulness in comparisionto the geometric return.

b. The arithmetic mean return is a better measure of what an investor in a stock actually earned over the period of his investment.

c. The geometric mean return will be greater than the arithmetric mean return in proportion to the standard deviation.

d. The geometric mean of stock returns over a long period of time will always be less than arithmetic mean.

e. The geometric mean return is always greater than the arithmetic mean return because it is based on compounding every year's returns.