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just stuck on this practice question thank you :) Lindy's Accounting Services (LAS) Limited is financed entirely by common stock currently valued at $26 per
just stuck on this practice question thank you :)
Lindy's Accounting Services (LAS) Limited is financed entirely by common stock currently valued at $26 per share and has a beta of 0.9. The company is expected to generate a level, perpetual stream of earnings and dividends. The stock has a price earnings (P/E) ratio of 3 and their cost of equity is 5.2%. LAS now decide to repurchase half of their shares and substitute an equal value of debt which has a beta of 0.7 and has a rate of return of 2.5%. Assume no taxes and that Modigliani and Miller are correct calculate the following under the new capital structure: a) The cost of equity (2 marks) b) The overall cost of capital (1 mark) c) The stock price (1 mark) d) The beta of the stock (2 marks) Step by Step Solution
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