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How to solve Q23 and what's the answer for Q24 M Company is financed entirely by common stock that is priced to offer a 20%

image text in transcribed How to solve Q23 and what's the answer for Q24
M Company is financed entirely by common stock that is priced to offer a 20% expected rate of return. The stock price is $60 and the earnings per share are $12. The company wishes to repurchase 50% of the stock and substitutes an equal value of debt yielding 8%. Suppose that before refinancing, an investor owned 100 shares of the company's common stock. What should he do if he wishes to ensure that risk and expected return on his investment are unaffected by refinancing? Buy 100 shares and invest $3,000 in bonds Sell 50 shares and purchase $3,000 debt (bonds) Borrow $3,000 and buy 50 more shares Continue to hold 100 shares There is nothing that he could do The possibility of bankruptcy has a negative effect on the value of the firm because Increased bankruptcy risk lowers project cash flows. Reorganization is costless but risk is not. A bankruptcy has real costs associated with it. Value enhancing strategies are no longer available. A, Band C

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