Spam Corporation is financed entirely by common stock and has a beta of 1.35. The firm is expected to generate a level, perpetual
stream of earnings and dividends. The stock has a price-earnings ratio of 8.10 and a cost of equity of 12.35%. The company's stock is
selling for $38. 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 3.5%. 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 1.35.The firm is expected to generate a level,perpetual stream of earnings and dividends. The stock has a price-earnings ratio of 8.10 and a cost of equity of 12.35%.The company's stock is selling for $38.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 3.5%.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