Macbeth Spot Removers is entirely equity financed with values as shown below: Data Number of shares Price per share 500 $ 10 Market value of shares $ 5,000 Market value of debt $ 5,000 $ 500 Interest at 4% Although it expects to have an income of $1,500 a year in perpetuity, this income is not certain. This table shows the return to stockholders under different assumptions about operating income. We assume no taxes. Outcomes Operating income (5) 500 1,000 Interest ($) 500 500 Equity earnings ($) 0 500 Earnings per share ($) 0 Return on shares (%) 0 1.00 10 1,500 500 1,000 2.00 20 2,000 500 1,500 3.00 38 Expected outcome Suppose that Macbeth Spot Removers issues only $3,000 of debt and uses the proceeds to repurchase 300 shares. The interest rate on the debt is 4%. a. Calculate the equity earnings, earnings per share, and return on shares for each operating income assumption. b. If the beta of Macbeth's assets is 0.85 and its debt is risk-free, what would be the beta of the equity after the debt issue?
Macbeth Spot Removers is entirely equity financed with values as shown below: Data Number of shares Price per share 500 $ 10 Market value of shares $ 5,000 Market value of debt $ 5,000 $ 500 Interest at 4% Although it expects to have an income of $1,500 a year in perpetuity, this income is not certain. This table shows the return to stockholders under different assumptions about operating income. We assume no taxes. Outcomes Operating income (5) 500 1,000 Interest ($) 500 500 Equity earnings ($) 0 500 Earnings per share ($) 0 Return on shares (%) 0 1.00 10 1,500 500 1,000 2.00 20 2,000 500 1,500 3.00 38 Expected outcome Suppose that Macbeth Spot Removers issues only $3,000 of debt and uses the proceeds to repurchase 300 shares. The interest rate on the debt is 4%. a. Calculate the equity earnings, earnings per share, and return on shares for each operating income assumption. b. If the beta of Macbeth's assets is 0.85 and its debt is risk-free, what would be the beta of the equity after the debt issue?
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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Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Question
Transcribed Image Text:Macbeth Spot Removers is entirely equity financed with values as shown below:
Data
Number of shares
500
Price per share
$ 10
Market value of shares
$ 5,000
Market value of debt
$ 5,000
$ 500
Interest at 4%
Although it expects to have an income of $1,500 a year in perpetuity, this income is not certain. This table shows the return to
stockholders under different assumptions about operating income. We assume no taxes.
Outcomes
Operating income ($)
500
1,000
Interest ($)
500
Equity earnings ($)
0
Earnings per share ($)
Return on shares (%)
0
Ө
500
500
1.00
10.
1,500
500
1,000
2.00
20
2,000
500
1,500
3.00
30
Expected
outcome
Suppose that Macbeth Spot Removers issues only $3,000 of debt and uses the proceeds to repurchase 300 shares. The interest rate
on the debt is 4%.
a. Calculate the equity earnings, earnings per share, and return on shares for each operating income assumption.
b. If the beta of Macbeth's assets is 0.85 and its debt is risk-free, what would be the beta of the equity after the debt issue?
Answer is complete but not entirely correct.
Complete this question by entering your answers in the tabs below.
Required A Required B
Calculate the equity earnings, earnings per share, and return on shares for each operating income assumption.
Note: Input all values as a positive number. Round your "Earnings per share" answers to 2 decimal places. Enter your "Return
on shares" answers as a percent rounded to 2 decimal places. Round the other answers to the nearest whole number.
Outcomes
Operating income ($)
500✓
1,000
1,500✓
2,000
Interest
120 ✔
Equity earnings ($)
380✔
120 ✔
880
120
1,380
120
1,880
Earnings per share ($)
1.90 x
4.40 x
6.90 X
9.40 X
Return on shares (%)
0.19 ×
0.44 x
0.69 x
0.94 X
Required A
Required B >
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