MM Proposition 2: McLaren Corp is financed entirely by common stock and has a beta of 1.0. The firm is expected to generate a level, perpetual stream of earnings and dividends. The stock has a price-earnings ratio of 8 and a cost of equity of 12.5%. The company’s stock is selling for $50. The firm decides to repurchase half its shares and substitute an equal value of debt (issue debt and use the proceeds to buy back shares). The debt is risk0free, with an interest rate of 5%. The company is exempt from corporate income taxes. Assuming MM are correct, calculate the following items after refinancing. a. The cost of equity. b. The overall cost of capital. c. The price-earnings ratio. d. The stock price. e. The stock’s beta. Please explain step by step, how you got all the values.
Dividend Policy
A dividend is a part of the profit paid to the shareholder in an organization. The management of the organization has the right to decide the policy for giving a dividend from the earnings to the shareholder. However, an organization is not in the obligation to declare a dividend for the investor. Dividend policy differs from organization to organization. As the management has the only authority to decide dividend rate, dividend amount, and time of dividend payout by considering all other elements that create an impact on the payment of a dividend.
Stocks And Dividends
Stock or equities are generally sold and bought in the Stock Exchange or which is popularly known as the stock market. Stocks are issued in the Stock Exchange for the sole purpose of raising funds for the Corporation or the company itself. Now since an individual has purchased a portion of the Corporation or company, he or she may claim to be a part of the earnings or profit of the company.
MM Proposition 2: McLaren Corp is financed entirely by common stock and has a beta of
1.0. The firm is expected to generate a level, perpetual stream of earnings and dividends.
The stock has a price-earnings ratio of 8 and a
stock is selling for $50. The firm decides to repurchase half its shares and substitute an
equal value of debt (issue debt and use the proceeds to buy back shares). The debt is
risk0free, with an interest rate of 5%. The company is exempt from corporate income
taxes. Assuming MM are correct, calculate the following items after refinancing.
a. The cost of equity.
b. The overall cost of capital.
c. The price-earnings ratio.
d. The stock price.
e. The stock’s beta.
Please explain step by step, how you got all the values.
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