16. Leverage and Risk Premiums. Astromet is financed entirely by common stock and has a beta of 1.0. The firm pays no taxes. The stock has a price-earnings multiple of 10 and is priced to offer a 10% expected return. The company decides to repurchase half the common stock and substitute an equal value of debt. (LOI) Assume that the debt yields a risk-free 5%. 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?)