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July 6, 2015

Homework Help: Finance

Posted by Samantha on Saturday, March 17, 2012 at 3:06pm.

Spam 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. 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 corporate income taxes. Assuming MM are correct, calculate the following items after the refinancing:
a. cost of equity
b. overall cost of capital (WACC)
c. price-earnings ratio
d. Stock price
e. stock's beta

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