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Astromet is financed entirely by common stock and has a beta of 1.90.

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Question

Astromet is financed entirely by common stock and has a beta of 1.90. The firm pays no taxes.;The stock has a price-earnings multiple of 12.0 and is priced to offer a 10.2% expected return.;The company decides to repurchase half the common stock and substitute an equal value of debt.;Assume that the debt yields a risk-free 4.8%. Calculate;a. the beta of the common stock after the refinancing.;b. the required return and risk premium on the common stock before the refinancing.;c. the required return and risk premium on the common stock after the refinancing.;d. the required return on the debt.;e. the required return on the company (i.e., stock and debt combined) after the refinancing.;Assume that the operating profit of the firm is expected to remain constant. Give;f. the percentage increase in earnings per share after the refinancing.;g. the new price-earnings multiple. (Hint: Has anything happened to the stock price?);Additional Requirements;Level of Detail: Show all work;Other Requirements: Need to understand how the debt-to-equity ratio and a debt-to-value ratio of debt/(debt + equity) is calculated

 

Paper#21824 | Written in 18-Jul-2015

Price : $27
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