The Rumpel Felt Co. was all equity financed. It recently borrowed mone

The Rumpel Felt Co. was all equity financed. It recently borrowed money and used the funds to repurchase shares. The stock price rose as a result. Which of the following explains the increase in stock price?

I. The tax shields generated by the new debt
II. A reduction in agency costs due to the interest on the debt
III. A generous premium included in the repurchase price
A) I only
B) II only
C) III only
D) I and II
E) I and III

ANSWER

D