1. Sung Enterprises, Inc. is financed entirely by common stock that is priced to offer a 20% expected rate of return. The stock price is $60 and the earnings per share are $12. Assume the company has 100 shares outstanding. Now, the firm repurchases 50 shares at the current market price by issuing an equal value of debt yielding 8%. What is the expected rate of return on the equity after the refinancing? Assume no taxes, no costs of financial distress, and continuous leverage rebalancing.
2. a.32%
3. b.30%
4. c.20%
5. d.28%