Spam Corp. is financed entirely by common stock and has a beta of 1.65. The firm

Question

Spam Corp. is financed entirely by common stock and has a beta of 1.65. The firm is expected to generate a level, perpetual stream of earnings and dividends. The stock has a price-earnings ratio of 3.71 and a cost of equity of 26.92%. The company’s stock is selling for $26. Now the firm decides to repurchase half of its shares and substitute an equal value of debt. The debt is risk-free, with a 6.5% interest rate. The company is exempt from corporate income taxes. Assume MM are correct.

a. Calculate the cost of equity after the refinancing.

b. Calculate the overall cost of capital (WACC) after the refinancing.

c. Calculate the price-earnings ratio after the refinancing

d. Calculate the stock price after the refinancing.

e. Calculate the stock’s beta after the refinancing.

Explanation / Answer

The correct answer is option b. Calculate the overall cost of capital (WACC) after the refinancing.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.