Spam Corp. is financed entirely by common stock and has a beta of 1.25. The firm is
Question:
Spam Corp. is financed entirely by common stock and has a beta of 1.25. The firm is expected to generate a level, perpetual stream of earnings and dividends. The stock has a price-earnings ratio of 6.80 and a cost of equity of 14.71%. The company's stock is selling for $42. Now the firm decides to repurchase half of its shares and substitute an equal value of debt. The debt is risk-free, with an interest rate of 5.5%. The company is exempt from corporate income taxes. Assume MM are correct.
a.Calculate the cost of equity after the refinancing.(Enter your answer as a percent rounded to 2 decimal places.)
Cost of equity=%
b.Calculate the overall cost of capital (WACC) after the refinancing.(Enter your answer as a percent rounded to 2 decimal places.)
Cost of capital=%
c.Calculate the price-earnings ratio after the refinancing.(Round your answer to 2 decimal places.)
Price-earnings ratio=
d.Calculate the stock price after the refinancing.(Round your answer to the nearest whole number.)
Stock price =$
e.Calculate the stock's beta after the refinancing.(Round your answer to 1 decimal place.)
Stock's beta =