Lindy's Accounting Services (LAS) Limited is financed entirely by common stock currently valued at $26 per share and has a beta of 0.9. The company is expected to generate a level, perpetual stream of earnings and dividends. The stock has a price earnings (P/E) ratio of 3 and their cost of equity is 5.2%. LAS now decide to repurchase half of their shares and substitute an equal value of debt which has a beta of 0.7 and has a rate of return of 2.5%. Assume no taxes and that Modigliani and Miller are correct calculate the following under the new capital structure: a) The cost of equity b) The overall cost of capital ) The stock price
Lindy's Accounting Services (LAS) Limited is financed entirely by common stock currently valued at $26 per share and has a beta of 0.9. The company is expected to generate a level, perpetual stream of earnings and dividends. The stock has a price earnings (P/E) ratio of 3 and their cost of equity is 5.2%. LAS now decide to repurchase half of their shares and substitute an equal value of debt which has a beta of 0.7 and has a rate of return of 2.5%. Assume no taxes and that Modigliani and Miller are correct calculate the following under the new capital structure: a) The cost of equity b) The overall cost of capital ) The stock price
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:Lindy's Accounting Services (LAS) Limited is financed entirely by common stock currently valued at
$26 per share and has a beta of 0.9. The company is expected to generate a level, perpetual stream
of earnings and dividends. The stock has a price earnings (P/E) ratio of 3 and their cost of equity is
5.2%. LAS now decide to repurchase half of their shares and substitute an equal value of debt which
has a beta of 0.7 and has a rate of return of 2.5%. Assume no taxes and that Modigliani and Miller
are correct calculate the following under the new capital structure:
a) The cost of equity
b) The overall cost of capital
c) The stock price
d) The beta of the stock
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