Question
HUBBARD INDUSTRIES IS AN ALL-EQUITY FIRM WHOSE SHARES HAVE AN EXPECTED RETURN OF 11.0%. HUBBARD DOES A LEVERAGED RECAPITALIZATION, ISSUING DEBT AND REPURCHASING STOCK, UNTIL
HUBBARD INDUSTRIES IS AN ALL-EQUITY FIRM WHOSE SHARES HAVE AN EXPECTED RETURN OF 11.0%. HUBBARD DOES A LEVERAGED RECAPITALIZATION, ISSUING DEBT AND REPURCHASING STOCK, UNTIL ITS DEBT-EQUITY RATIO IS 0.68. DUE TO THE INCREASED RISK, SHAREHOLDERS NOW EXPECT A RETURN OF 17.4%. ASSUMING THERE ARE NO TAXES AND HUBBARDS DEBT IS RISK-FREE, WHAT IS THE INTEREST RATE ON THE DEBT?
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Fintech For Finance Professionals
Authors: David Kuo Chuen Lee, Joseph Lim, Kok Fai Phoon, Yu Wang
1st Edition
9811241864, 978-9811241864
