Question
CASA has no debt. The action's beta, BE, is 1.2 and its expected return, RE, is 12.5%. The company decides to go into debt at
CASA has no debt. The action's beta, BE, is 1.2 and its expected return, RE, is 12.5%. The company decides to go into debt at the risk-free rate, Rf, of 5% to buy 40% of its shares. Capital markets are assumed to be perfect:
a) Find the value of RE after the buyback operation knowing that before the operation the expected earnings per share (EPS) was $ 1.5 and the expected PER (the ratio between the share price and the Expected EPS) is 14.
b) What is the expected EPS of the company after the operation? Is this change beneficial to shareholders?
c) What is the expected PER after the operation? Does this sound reasonable?
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Get StartedRecommended Textbook for
Microeconomics Theory and Applications with Calculus
Authors: Jeffrey M. Perloff
3rd edition
133019934, 978-0133019933
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