Question

Skyenergy is considering a recapitalization that would increase its debt ratio and increase its interest expense. The company would issue new bonds and use the proceeds to buy back shares of its common stock. The company's CFO thinks the plan will not change total assets or operating income, but that it will increase earnings per share (EPS). Assuming the CFO's estimates are correct, which of the following statements would be accurate concerning the proposed plan? Question 5 options:

a) If it reduces the WACC, the stock price is also likely to decline.

b) If it does increase the EPS, the stock price will automatically increase at the same rate.

c) It increases the financial risk so the company's stock price still might fall even if EPS increases.

d) There will be more bonds outstanding, and that will increase their liquidity and thus lower the interest rate on the currently outstanding bonds.