a. Calculate the cost of equity after the refinancing. Note: Enter your answer as a percent rounded to 2 decimal places. b. Calculate the overall cost of capital (WACC) after the refinancing. Note: Enter your answer as a percent rounded to 2 decimal places. c. Calculate the price-earnings ratio after the refinancing. Note: Do not round intermediate calculations. Round your answer to 2 decimal places.
a. Calculate the cost of equity after the refinancing. Note: Enter your answer as a percent rounded to 2 decimal places. b. Calculate the overall cost of capital (WACC) after the refinancing. Note: Enter your answer as a percent rounded to 2 decimal places. c. Calculate the price-earnings ratio after the refinancing. Note: Do not round intermediate calculations. Round your answer to 2 decimal places.
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter15: Capital Structure Decisions
Section: Chapter Questions
Problem 11P: The Rivoli Company has no debt outstanding, and its financial position is given by the following...
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Question
![Spam Corporation is financed entirely by common stock and has a beta of 1.60. The firm is expected to generate a level, perpetual
stream of earnings and dividends. The stock has a price-earnings ratio of 7.60 and a cost of equity of 13.16%. The company's stock is
selling for $28. Now the firm decides to repurchase half of its shares and substitute an equal value of debt. The debt is risk-free, with
an interest rate of 6%. The company is exempt from corporate income taxes. Assume MM are correct.
a. Calculate the cost of equity after the refinancing.
Note: Enter your answer as a percent rounded to 2 decimal places.
b. Calculate the overall cost of capital (WACC) after the refinancing.
Note: Enter your answer as a percent rounded to 2 decimal places.
c. Calculate the price-earnings ratio after the refinancing.
Note: Do not round intermediate calculations. Round your answer to 2 decimal places.
d. Calculate the stock price after the refinancing.
e. Calculate the stock's beta after the refinancing.
Note: Round your answer to 1 decimal place.
a. Cost of equity
b. Cost of capital
c. Price-earnings ratio
d. Stock price
e. Stock's beta
%
%](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fd00261c3-4893-4528-9e55-1c45ae7110ab%2Fb60ca6a9-8ba7-4cfd-b21b-e5c0fd789053%2Fq4ltt4d_processed.png&w=3840&q=75)
Transcribed Image Text:Spam Corporation is financed entirely by common stock and has a beta of 1.60. The firm is expected to generate a level, perpetual
stream of earnings and dividends. The stock has a price-earnings ratio of 7.60 and a cost of equity of 13.16%. The company's stock is
selling for $28. Now the firm decides to repurchase half of its shares and substitute an equal value of debt. The debt is risk-free, with
an interest rate of 6%. The company is exempt from corporate income taxes. Assume MM are correct.
a. Calculate the cost of equity after the refinancing.
Note: Enter your answer as a percent rounded to 2 decimal places.
b. Calculate the overall cost of capital (WACC) after the refinancing.
Note: Enter your answer as a percent rounded to 2 decimal places.
c. Calculate the price-earnings ratio after the refinancing.
Note: Do not round intermediate calculations. Round your answer to 2 decimal places.
d. Calculate the stock price after the refinancing.
e. Calculate the stock's beta after the refinancing.
Note: Round your answer to 1 decimal place.
a. Cost of equity
b. Cost of capital
c. Price-earnings ratio
d. Stock price
e. Stock's beta
%
%
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