Question
Astromet is financed entirely by common stock and has a beta of 1.30. The firm pays no taxes. The stock has a price-earnings multiple of
Astromet is financed entirely by common stock and has a beta of 1.30. The firm pays no taxes. The stock has a price-earnings multiple of 12.0 and is priced to offer a 11.4% expected return. The company decides to repurchase half the common stock and substitute an equal value of debt. Assume that the debt yields a risk-free 4.8%. Calculate the following:
The following is known:
Beta of common stock is 2.6
Required return (before refinancing) is 11.4%
Risk Premium (before refinancing) is 6.6%
Required return (after refinancing) is 18.0%
Risk premium (after refiancing) is 13.2%
Required return on the debt is 4.8%
Required return on the company (i.e., stock and debt combined is 11.4%
The following questions need to be answered (preferrably in Excel)
If EBIT remains constant:
f. What is the percentage increase in earnings per share after the refinancing?
g-1. What is the new price-earnings multiple?
g-2. Has anything happened to the stock price?
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