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MMM Co. has unleveraged beta 1.2, risk free rate 5%, and market risk premium for 4%. It works in the 40% tax bracket. The company
MMM Co. has unleveraged beta 1.2, risk free rate 5%, and market risk premium for 4%. It works in the 40% tax bracket. The company is intending to build a new plant, and is studying the scenarios to finance it;
The first scenario (1) is to finance the plant totally from equity, without any debt, and then the expected earnings per share will be to $2.7/share.
The second scenario(2) is to finance the plant from a combination of debt and equity, where it is intending to borrow 30% of the budget with an interest rate of 9% before tax, then the expected earnings per share will increase to $3.2/share.
2- Under the first scenario, price per share is *
$32.55/share
$29.33/share
$25.63/share
$2.7/share
None of the above
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