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Spam Corp. is financed entirely by common stock and has a beta of 1. The firm is expected to generate a level, perpetual stream of earnings and...
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
