Spam Corp. is financed entirely by common stock and has a beta of 1.10. The firm is expected to generate a level, perpetual stream of earnings and dividends. The stock has a price-earnings ratio of 7.10 and a cost of equity of 14.08%. The company's stock is selling for $48. Now the firm decides to repurchase half of its shares and substitute an equal value of debt. The debt is risk-free, with an interest rate of 4%. The company is exempt from corporate income taxes. Assume MM are correct. a. Calculate the cost of equity after the refinancing. (Enter your answer as a percent rounded to 2 decimal places.) b. Calculate the overall cost of capital (WACC) after the refinancing. (Enter your answer as a percent rounded to 2 decimal places.) c. Calculate the price-earnings ratio after the refinancing. (Do not round intermediate calculations. Round your answer to 2 decimal places.) d. Calculate the stock price after the refinancing. e. Calculate the stock's beta after the refinancing. (Round your answer to 1 decimal place.) a. Cost of equity 24.16% b. Cost of capital 14.08% c. Price-earnings ratio d. Stock price e. Stock's beta 2.2
Spam Corp. is financed entirely by common stock and has a beta of 1.10. The firm is expected to generate a level, perpetual stream of earnings and dividends. The stock has a price-earnings ratio of 7.10 and a cost of equity of 14.08%. The company's stock is selling for $48. Now the firm decides to repurchase half of its shares and substitute an equal value of debt. The debt is risk-free, with an interest rate of 4%. The company is exempt from corporate income taxes. Assume MM are correct. a. Calculate the cost of equity after the refinancing. (Enter your answer as a percent rounded to 2 decimal places.) b. Calculate the overall cost of capital (WACC) after the refinancing. (Enter your answer as a percent rounded to 2 decimal places.) c. Calculate the price-earnings ratio after the refinancing. (Do not round intermediate calculations. Round your answer to 2 decimal places.) d. Calculate the stock price after the refinancing. e. Calculate the stock's beta after the refinancing. (Round your answer to 1 decimal place.) a. Cost of equity 24.16% b. Cost of capital 14.08% c. Price-earnings ratio d. Stock price e. Stock's beta 2.2
Chapter15: Capital Structure Decisions
Section: Chapter Questions
Problem 8P
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Transcribed Image Text:Spam Corp. is financed entirely by common stock and has a beta of
1.10. The firm is expected to generate a level, perpetual stream of
earnings and dividends. The stock has a price-earnings ratio of 7.10 and
a cost of equity of 14.08%. The company's stock is selling for $48. Now
the firm decides to repurchase half of its shares and substitute an equal
value of debt. The debt is risk-free, with an interest rate of 4%. The
company is exempt from corporate income taxes. Assume MM are
correct.
a. Calculate the cost of equity after the refinancing. (Enter your
answer as a percent rounded to 2 decimal places.)
b. Calculate the overall cost of capital (WACC) after the refinancing.
(Enter your answer as a percent rounded to 2 decimal places.)
c. Calculate the price-earnings ratio after the refinancing. (Do not
round intermediate calculations. Round your answer to 2 decimal
places.)
d. Calculate the stock price after the refinancing.
e. Calculate the stock's beta after the refinancing. (Round your answer
to 1 decimal place.)
a. Cost of equity
24.16%
b. Cost of capital
14.08%
c. Price-earnings ratio
d. Stock price
e. Stock's beta
2.2
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