如下

问题如下：

A company can borrow funds at an after-tax cost of 4.5 percent. The company’s stock price is $40 per share, earnings per share is $2.00, and the company has 15 million shares outstanding. If the company borrows just enough to repurchase 2 million shares of stock at the prevailing market price, that company’s earnings per share is most likely to:

选项：

A.

increase.

B.

decrease.

C.

remain the same.

解释：

A  is correct.

The company’s earnings yield (E/P) is $2/$40 = 0.05. When the earnings yield is greater than the after-tax cost of borrowed funds, EPS will increase if shares are repurchased using borrowed funds.