Question
An all-equity firm is expected to have earnings per share in perpetuity of $6.00.The current price is $40.00 per share, which implies the equity capitalization
An all-equity firm is expected to have earnings per share in perpetuity of $6.00.The current price is $40.00 per share, which implies the equity capitalization rate (rE) is 15percent.Suppose the firm issues debt and uses the proceeds to buy back stock so that expected earnings per share increase to $7.00 in perpetuity.Assuming a world where Modigliani-Miller Proposition I holds, what is
(a) thenew share price
(b) thenew equity capitalization rate(rE)?
Step by Step Solution
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Step: 1
According to ModiglianiMiller Proposition I in a world with no taxes or financial distr...
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Corporate Finance
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe
13th International Edition
1265533199, 978-1265533199
