Suppose that Macbeth Spot Removers issues only $2,500 of debt and uses the proceeds to repurchase 250 shares.

a. Rework Table 17.2 to show how earnings per share and share return now vary with operating income.

b. If the beta of Macbeth’s assets is .8 and its debt is risk-free, what would be the beta of the equity after the debt issue?

PROBLEM SETS Miller reviews the MM propositions in:

M. H. Miller, “The Modigliani-Miller Propositions after Thirty Years,” Journal of Applied Corporate Finance 2 (Spring 1989), pp. 6–18.

For a skeptic’s view of MM’s arguments see:

S. Titman, “The Modigliani-Miller Theorem and the Integration of Financial Markets,”

Financial Management 31 (Spring 2002), pp. 101–115.

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