PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 17, Problem 11PS
MM proposition 2 Spam Corp. is financed entirely by common stock and has a beta of 1.0. The firm is expected to generate a level, perpetual stream of earnings and dividends. The stock has a price–earnings ratio of 8 and a
- a. The cost of equity.
- b. The overall cost of capital.
- c. The price–earnings ratio.
- d. The stock price.
- e. The stock’s beta.
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MM Proposition 2: McLaren Corp is financed entirely by common stock and has a beta of1.0. The firm is expected to generate a level, perpetual stream of earnings and dividends.The stock has a price-earnings ratio of 8 and a cost of equity of 12.5%. The company’sstock is selling for $50. The firm decides to repurchase half its shares and substitute anequal value of debt (issue debt and use the proceeds to buy back shares). The debt isrisk0free, with an interest rate of 5%. The company is exempt from corporate incometaxes. Assuming MM are correct, calculate the following items after refinancing.a. The cost of equity.b. The overall cost of capital.c. The price-earnings ratio.d. The stock price.e. The stock’s beta.
Please explain step by step, how you got all the values.
Spam Corp. is financed entirely by common stock and has a beta of 1.0. The firm is expected to generate a
evel, perpetual stream of earnings and dividends. The stock has a price-earnings ratio of 8 and a cost of
equity of 12.5%. The company's stock is selling for $50. Now the firm decides to repurchase half of its shares
and substitute an equal value of debt. The debt is risk-free, with a 5% interest rate. The company is exempt
from corporate income taxes. Assuming MM are correct, calculate the following items after the refinancing:
a. The cost of equity
b. The overall cost of capital (WACC)
Problem 3.1.
Assume CAPM. Assume that the risk-free interest rate equals 0.03
and that the market retur equals 0.08. Consider a company which currently has 2 million shares
outsanding with the stock price of $20 per share. The equity rate is 0.09. The company has ten
million dollars in debt with the debt beta equal to 0.4. The weighted average cost of capital is
0.0796. Calculate the capital tax rate.
Chapter 17 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 17 - Homemade leverage Ms. Kraft owns 50,000 shares of...Ch. 17 - Homemade leverage Companies A and B differ only in...Ch. 17 - Corporate leverage Suppose that Macbeth Spot...Ch. 17 - Corporate leverage Reliable Gearing currently is...Ch. 17 - MMs propositions True or false? a. MMs...Ch. 17 - MMs propositions What is wrong with the following...Ch. 17 - Prob. 7PSCh. 17 - MM proposition 1 Executive Cheese has issued debt...Ch. 17 - Prob. 9PSCh. 17 - Prob. 10PS
Ch. 17 - MM proposition 2 Spam Corp. is financed entirely...Ch. 17 - MM proposition 2. Increasing financial leverage...Ch. 17 - Prob. 13PSCh. 17 - MM proposition 2 Look back to Section 17-1....Ch. 17 - MM proposition 2 Hubbards Pet Foods is financed...Ch. 17 - MM proposition 2 Imagine a firm that is expected...Ch. 17 - MM proposition 2 Archimedes Levers is financed by...Ch. 17 - MM proposition 2 Look back to Problem 17. Suppose...Ch. 17 - Prob. 19PSCh. 17 - After-tax WACC Gaucho Services starts life with...Ch. 17 - After-tax WACC Omega Corporation has 10 million...Ch. 17 - After-tax WACC Gamma Airlines has an asset beta of...Ch. 17 - Prob. 23PSCh. 17 - Investor choice People often convey the idea...Ch. 17 - Investor choice Suppose that new security designs...
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