Leverage and the cost of capital Suppose that Macbeth Spot Removers issues only $2,500 of debt and uses the proceeds to repurchase 250 shares.

a. Rework Table 17.2 to show how earnings per share and share return now vary with operating income.

b. If the beta of Macbeths assets is .8 and its debt is risk-free, what would be the beta of the equity after the debt issue?

Note: solution on chegg is present but faulty

Data Number of shares Price per share Market value of shares Market value of debt Interest at 10% 500 $10 $5,000 $5,000 $500 > TABLE 17.2 Macbeth Spot Removers is wondering whether to issue $5,000 of debt at an interest rate of 10% and repurchase 500 shares. This table shows the return to the shareholder under different assumptions about operating income. 500 Outcomes 1,000 500 Operating income ($) Interest ($) Equity earnings ($) Earnings per share ($) Return on shares (%) 1,500 500 1,000 2,000 500 1,500 500 10 20 Expected outcome