Astromet is financed entirely by common stock and has a beta of 1.50. The firm pays no taxes. The stock has a price-earnings multiple of 14.0 and is priced to offer a 10.6% 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 4.2%. 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. Req A to E Req F to G2 a. The beta of the common stock after the refinancing Note: Enter your answer rounded to 1 decimal place. b. The required return and risk premium on the common stock before the refinancing Note: Enter your answer as a percent rounded to 1 decimal place. c. The required return and risk premium on the common stock after the refinancing Note: Enter your answer as a percent rounded to 1 decimal place. d. The required return on the debt Note: Enter your answer as a percent rounded to 1 decimal place. e. The required return on the company (i.e., stock and debt combined) after the refinancing Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place. Show less▲
Astromet is financed entirely by common stock and has a beta of 1.50. The firm pays no taxes. The stock has a price-earnings multiple of 14.0 and is priced to offer a 10.6% 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 4.2%. 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. Req A to E Req F to G2 a. The beta of the common stock after the refinancing Note: Enter your answer rounded to 1 decimal place. b. The required return and risk premium on the common stock before the refinancing Note: Enter your answer as a percent rounded to 1 decimal place. c. The required return and risk premium on the common stock after the refinancing Note: Enter your answer as a percent rounded to 1 decimal place. d. The required return on the debt Note: Enter your answer as a percent rounded to 1 decimal place. e. The required return on the company (i.e., stock and debt combined) after the refinancing Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place. Show less▲
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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Transcribed Image Text:Astromet is financed entirely by common stock and has a beta of 1.50. The firm pays no taxes. The stock has a price-earnings multiple
of 14.0 and is priced to offer a 10.6% 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 4.2%. 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.
Req A to E
Req F to G2
a. The beta of the common stock after the refinancing
Note: Enter your answer rounded to 1 decimal place.
b. The required return and risk premium on the common stock before the refinancing
Note: Enter your answer as a percent rounded to 1 decimal place.
c. The required return and risk premium on the common stock after the refinancing
Note: Enter your answer as a percent rounded to 1 decimal place.
d. The required return on the debt
Note: Enter your answer as a percent rounded to 1 decimal place.
e. The required return on the company (i.e., stock and debt combined) after the refinancing
Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.
Show less▲
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Step 1: Determine the Variants
VIEWStep 2: Part a, b, c Calculate the Beta of common stock, Risk Premium (before and After refinancing)
VIEWStep 3: Part d and e . calculate the required return on debt and required return on asset after refinancing
VIEWStep 4: Calculate the Percentage Increase in EPS and New Price earning multiple
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