Spam Corp. is financed entirely by common stock and has a beta of 1.0. The firm is expected to generate a level, perpectual steam 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. Now the firm decides to repurchase half of its shares and substitute an equal value of debt. The debt is risk-free, with a 5% interest rate. The company is exempt from income taxes. Assuming MM are correct, calculate the following items after refinancing: (i) Return on equity; (ii) the stock’s beta.
Spam Corp. is financed entirely by common stock and has a beta of 1.0. The firm is expected to generate a level, perpectual steam 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. Now the firm decides to repurchase half of its shares and substitute an equal value of debt. The debt is risk-free, with a 5% interest rate. The company is exempt from income taxes. Assuming MM are correct, calculate the following items after refinancing: (i) Return on equity; (ii) the stock’s beta.
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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Spam Corp. is financed entirely by common stock and has a beta of 1.0. The firm is expected to generate a level, perpectual steam of earnings and dividends. The stock has a price-earnings ratio of 8 and a
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