Spam Corporation is financed entirely by common stock and has a beta of 1.15. The firm is expected to generate a level, perpetual stream of earnings and dividends. The stock has a price-earnings ratio of 7.00 and a cost of equity of 14.29%. The company's stock is selling for $46. 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 4.5%. The company is exempt from corporate income taxes. Assume MM are correct. a. Calculate the cost of equity after the refinancing. Note: Enter your answer as a percent rounded to 2 decimal places. b. Calculate the overall cost of capital (WACC) after the refinancing. Note: Enter your answer as a percent rounded to 2 decimal places. c. Calculate the price-earnings ratio after the refinancing. Note: 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. Note: Round your answer to 1 decimal place.
Spam Corporation is financed entirely by common stock and has a beta of 1.15. The firm is expected to generate a level, perpetual stream of earnings and dividends. The stock has a price-earnings ratio of 7.00 and a cost of equity of 14.29%. The company's stock is selling for $46. 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 4.5%. The company is exempt from corporate income taxes. Assume MM are correct. a. Calculate the cost of equity after the refinancing. Note: Enter your answer as a percent rounded to 2 decimal places. b. Calculate the overall cost of capital (WACC) after the refinancing. Note: Enter your answer as a percent rounded to 2 decimal places. c. Calculate the price-earnings ratio after the refinancing. Note: 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. Note: Round your answer to 1 decimal place.
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:Problem 16-11 MM proposition 2
Spam Corporation is financed entirely by common stock and has a beta of 1.15. The firm is expected to generate a level, perpetual
stream of earnings and dividends. The stock has a price-earnings ratio of 7.00 and a cost of equity of 14.29%. The company's stock is
selling for $46. 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 4.5%. The company is exempt from corporate income taxes. Assume MM are correct.
a. Calculate the cost of equity after the refinancing.
Note: Enter your answer as a percent rounded to 2 decimal places.
b. Calculate the overall cost of capital (WACC) after the refinancing.
Note: Enter your answer as a percent rounded to 2 decimal places.
c. Calculate the price-earnings ratio after the refinancing.
Note: 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.
Note: Round your answer to 1 decimal place.
a. Cost of equity
b. Cost of capital
c. Price-earnings ratio
d. Stock price
e. Stock's beta
%
%
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