Question
Macbeth Spot Removers is entirely equity financed with values as shown below: Data Number of shares 2,700 Price per share $ 27 Market value of
Macbeth Spot Removers is entirely equity financed with values as shown below:
Data | ||||
Number of shares | 2,700 | |||
Price per share | $ | 27 | ||
Market value of shares | $ | 72,900 | ||
Although it expects to have an income of $3,200 a year in perpetuity, this income is not certain. This table shows the return to stockholders under different assumptions about operating income. We assume no taxes.
Outcomes | ||||
Operating income ($) | 2,200 | 2,700 | 3,200 | 3,700 |
Suppose that Macbeth Spot Removers issues only $7,830 of debt and uses the proceeds to repurchase 290 shares. The interest rate on the debt is 9%.
a. Calculate the equity earnings, earnings per share, and return on shares for each operating income assumption. (Input all values as a positive number. Round your "Earnings per share" answers to 2 decimal places. Enter your "Return on shares" answers as a percent rounded to 2 decimal places. Round the other answers to the nearest whole number.)
Outcome | outcome | outcome | outcome | |
Operating Income | ||||
Interest | ||||
Equity earnings | ||||
Earnings per share | ||||
Return on Shares |
b. If the beta of Macbeth's assets is 0.65 and its debt is risk-free, what would be the beta of the equity after the debt issue? (Round your answers to 2 decimal places.)
All equity beta | |
debt beta | |
D/E ratio | |
Equity beta |
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