I f t h e b e t a o f M a c b e t h ' s a s s e t s i s 0 . 7 5 a n d i t s d e b t i s r i s k - f r e e , w h a t w o u l d b e t h e b e t a of t h e e q u i t y a f t e r t h e d e b t i s s u e ? 1- A l l - e q u i t y b e t a 2- D e b t b e t a 3- D / E r a t i o 4- E q u i t y b e ta?
I f t h e b e t a o f M a c b e t h ' s a s s e t s i s 0 . 7 5 a n d i t s d e b t i s r i s k - f r e e , w h a t w o u l d b e t h e b e t a of t h e e q u i t y a f t e r t h e d e b t i s s u e ? 1- A l l - e q u i t y b e t a 2- D e b t b e t a 3- D / E r a t i o 4- E q u i t y b e ta?
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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b . I f t h e b e t a o f M a c b e t h ' s a s s e t s i s 0 . 7 5 a n d i t s d e b t i s r i s k - f r e e , w h a t w o u l d b e t h e b e t a of t h e e q u i t y a f t e r t h e d e b t i s s u e ? 1- A l l - e q u i t y b e t a 2- D e b t b e t a 3- D / E r a t i o 4- E q u i t y b e ta?
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Outcomes
Operating income ($)
2,400
2,900
3,400
3,900
Suppose that Macbeth Spot Removers issues only $8,990 of debt and uses the proceeds to repurchase 310 shares. The
interest rate on the debt is 9%.
a. Calculate the equity earnings, earnings per share, and return on shares for each operating income assumption. (Input all
values as a positive number. Round your "Earnings per share" answers to 2 decimal places. Enter your "Return on
shares" answers as a percent rounded to 2 decimal places. Round the other answers to the nearest whole number.)
Outcomes
Operating income ($)
Interest
Equity earnings ($)
Earnings per share ($)
Return on shares (%)
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Macbeth Spot Removers is entirely equity financed with values as shown below:
Data
Number of shares
Price per share
Market value of shares
2,900
24
29
$ 84,100
Although it expects to have an income of $3,400 a year in perpetuity, this income is not certain. This table shows the return
to stockholders under different assumptions about operating income. We assume no taxes.
Outcomes
Operating income ($)
2,400
2,900
3,400
3,900
Suppose that Macbeth Spot Removers issues only $8,990 of debt and uses the proceeds to repurchase 310 shares. The
interest rate on the debt is 9%.
a. Calculate the equity earnings, earnings per share, and return on shares for each operating income assumption. (Input all
values as a positive number. Round your "Earnings per share" answers to 2 decimal places. Enter your "Return on
shares" answers as a percent rounded to 2 decimal places. Round the other answers to the nearest whole number.)
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