Question

If MM's proposition II without taxes is true, what is the return to investors who invest $20 in a stock, borrow another $20 to buy a share of stock and pay 6% on the borrowed money if the EPS is $1.50?

a. 6.0%.
b. 9.0%.
c. 12.0%.
d. 15.0%.

Answer 1

b. 9.0%.

Step-by-step explanation:

The computation of the return on the investment is shown below:

Net earning is

= Earning per share × number of shares - interest paid

= (1.50 × 2) - ($20 × 6%)

= $1.80

Now the return on the investment is

= Net earning ÷ own investment

= $1.80 ÷ $20 × 100

= 9%

Hence, the return on the investment is 9%