Yerba Industries is anall-equity firm whose stock has a beta of 0.80 and an expected return of 20%. Suppose it issues newrisk-free debt with a 5.5% yield and repurchase 50% of its stock. Assume perfect capital markets.

a. What is the beta of Yerba stock after thistransaction?

b. What is the expected return of Yerba stock after thistransaction?

Suppose that prior to thistransaction, Yerba expected earnings per share this coming year of $0.50, with a forwardP/E ratio(that is, the share price divided by the expected earnings for the comingyear) of 12.

c. What isYerba's expected earnings per share after thistransaction? Does this change benefit theshareholder? Explain.

d. What isYerba's forwardP/E ratio after thistransaction? Is this change in theP/E ratioreasonable? Explain.