EXCEL SOLUTION

Salish Industries is an all$-$equity firm whose stock has a beta of $1\mathrm{.}2$ and an expected return of $12\mathrm{.}5\%.$ Suppose it issues new risk$-$free debt with a $5\%$ yield and repurchases $40\%$ of its stock. Assume perfect capital markets.

a$.$ What is the beta of Salish stock after this transaction?

b$.$ What is the expected return of Salish stock after this transaction?

Suppose that prior to this transaction, Salish had expected EPS this coming year of $$1\mathrm{.}50,$ with a forward P$/$E ratio $($i$.$e$.,$ the share price divided by the expected earnings for the coming year$)$ of $14.$

c$.$ What is Salish$$s expected EPS after this transaction? Does this change benefit shareholders? Explain.

d$.$ What is Salish$$s forward P$/$E ratio after this transaction? Is this change in the P$/$E ratio reasonable? Explain.