Astromet is financed entirely by common stock and has a beta of 1.30. The firm pays no taxes. The stock has a price-earnings multiple of 12.0 and is priced to offer a 11.4% 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 4.8%. Calculate the following: The following is known: Beta of common stock is 2.6 Required return (before refinancing) is 11.4% Risk Premium (before refinancing) is 6.6% Required return (after refinancing) is 18.0% Risk premium (after refiancing) is 13.2% Required return on the debt is 4.8% Required return on the company (i.e., stock and debt combined is 11.4%   The following questions need to be answered (preferrably in Excel) 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?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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Astromet is financed entirely by common stock and has a beta of 1.30. The firm pays no taxes. The stock has a price-earnings multiple of 12.0 and is priced to offer a 11.4% 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 4.8%. Calculate the following:

The following is known:

Beta of common stock is 2.6

Required return (before refinancing) is 11.4%

Risk Premium (before refinancing) is 6.6%

Required return (after refinancing) is 18.0%

Risk premium (after refiancing) is 13.2%

Required return on the debt is 4.8%

Required return on the company (i.e., stock and debt combined is 11.4%

 

The following questions need to be answered (preferrably in Excel)

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?

 

 

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