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Astromet is financed entirely by common stock and has a beta of 1.20. The fim pays no taxes. The stock has a price-earnings multiple of 11.0 and is priced to offer a 10.9% expected return. The company decides to repurchase half the common stock and substitute an equal value of debt Assume that the debt yields a risk-free 4.6%. Calculate the following Required: a. The beta of the common stock after the refinancing b. The required return and risk premium on the common stock before the refinancing c. The required return and risk premium on the common stock after the refinancing d. The required return on the debt e. The required return on the company (i.e, stock and debt combined) after the refinancing

Astromet is financed entirely by common stock and has a beta of 1.20. The fim pays no taxes. The stock has a price-earnings multiple of 11.0 and is priced to offer a 10.9% expected return. The company decides to repurchase half the common stock and substitute an equal value of debt Assume that the debt yields a risk-free 4.6%. Calculate the following Required: a. The beta of the common stock after the refinancing b. The required return and risk premium on the common stock before the refinancing c. The required return and risk premium on the common stock after the refinancing d. The required return on the debt e. The required return on the company (i.e, stock and debt combined) after the refinancing

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Astromet is financed entirely by common stock and has a beta of 1.20. The firm pays no taxEs. The stock has a price-earnings multiple of 11.0 and is priced to offer a 10.9% expected return. The company decides to repurchase half the common stock and substitute an equal value of debt Assume that the debt yields a risk-free 4.6%. Calculate the following: Required: a. The beta of the common stock after the refinancing b. The required return and risk premium on the common stock before the refinancing c. The required return and risk premium on the common stock after the refinancing d. The required return on the debt e. The required return on the company (i.e, stock and debt combined) after the refinancing If EBIT remains constant: f. What is the percentage increase in earnings per share after the refinancing? g-1. What is the new price-earnings multiple? g-2. Has anything happened to the stock price? Complete this question by entering your answers in the tabs below. Reg A to E Req F to G2 a. The beta of the common stock after the refinancing (Enter your answer rounded to 1 decimal place.) b. The required return and risk premium on the common stock before the refinancing (Enter your answer as a percent rounded to 1 decimal place.) < Prey 8 of 8 Next arch
Transcribed Image Text:Astromet is financed entirely by common stock and has a beta of 1.20. The firm pays no taxEs. The stock has a price-earnings multiple of 11.0 and is priced to offer a 10.9% expected return. The company decides to repurchase half the common stock and substitute an equal value of debt Assume that the debt yields a risk-free 4.6%. Calculate the following: Required: a. The beta of the common stock after the refinancing b. The required return and risk premium on the common stock before the refinancing c. The required return and risk premium on the common stock after the refinancing d. The required return on the debt e. The required return on the company (i.e, stock and debt combined) after the refinancing If EBIT remains constant: f. What is the percentage increase in earnings per share after the refinancing? g-1. What is the new price-earnings multiple? g-2. Has anything happened to the stock price? Complete this question by entering your answers in the tabs below. Reg A to E Req F to G2 a. The beta of the common stock after the refinancing (Enter your answer rounded to 1 decimal place.) b. The required return and risk premium on the common stock before the refinancing (Enter your answer as a percent rounded to 1 decimal place.) < Prey 8 of 8 Next arch
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