Data
Number of shares 500
Price per share $ 10
Market value of shares $ 5,000
Market value of debt $ 5,000
Interest at 10% $ 500
Although It expects to have an income of $1,500 a year in perpetuity, this Income is not certain. This table shows the return to
stockholders under different assumptions about operating Income. We assume no taxes.
Outcomes
Operating income ($) 500 1,000 1,500 2,000
Interest ($) 500 500 500 500
Equity earnings ($) 0 500 1,000 1,500
Earnings per share ($) 0 1.00 2.00 3.00
Return on shares (%) 0 10 20 30
Expected
outcome
Suppose that Macbeth Spot Removers Issues only $4,000 of debt and uses the proceeds to repurchase 400 shares. The Interest rate
on the debt is 10%.
a. Calculate the equity earnings, earnings per share, and return on shares for each operating Income assumption.
b. If the beta of Macbeth's assets is 0.80 and its debt is risk-free, what would be the beta of the equity after the debt Issue?
☑ Answer is not complete.
Complete this question by entering your answers in the tabs below.
Required A Required B
Calculate the equity earnings, earnings per share, and return on shares for each operating income assumption.
Note: Input all values as a positive number. Round your "Earnings per share" answers to 2 decimal places. Enter your "Return
on shares" answers as a percent rounded to 2 decimal places. Round the other answers to the nearest whole number.
Outcomes
Operating income ($) 500 1,000 1,500 2,000
Interest 400 400 400 400
Equity earnings ($) 100 600 1,100 1,600
Earnings per share ($)
Return on shares (%)
