Question
Part A: Corp A has an all-equity capital structure with a beta of 1.5.Corp A's expected return on equity is 13.0%. Suppose it issues risk-free
Part A:
Corp A has an all-equity capital structure with a beta of 1.5.Corp A's expected return on equity is 13.0%. Suppose it issues risk-free debt with a 4% yield.Corp A uses the money to repurchase 30% of its stock.Assume perfect capital markets. What is the beta of Corp A's stock after the share repurchase? What is the expected return on equity?
Part B:
Assume now that earnings were $2.00 per share before the buyback was announced and Corp A's 12-month forward P/E was projected to be 12 (the ratio of the stock price to next year's expected earnings).What are earnings per share after the buyback? Does the benefit to shareholders change?Why or why not? What is Corp A's P/E after the buyback?
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