{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

CHAPTER 17

# 10 010 010 010 re 0180 0207 0260 0420

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: nd the firm’s cost of capital is 8%. We know that these overall firm values will not change after the refinancing and that the debt is risk­free. a. 0.8 = (0.5 ´ 0) + (0.5 ´ bE) bE = 1.60 b. Before the refinancing, the stock’s required return is 8% and the risk­free rate is 5%; thus, the risk premium for the stock is 3%. c. After the refinancing: 0.08 = (0.5 ´ 0.05) + (0.5 ´ rE) rE = 0.11 = 11.0% After the refinancing, the risk premium for the stock is 6%. d. The required return for the debt is 5%, the risk­free rate. e. The required return for the company remains at 8%. f. Let E be the operating profit of the company and N the number of shares outstanding before the refinancing. Also, we know that E is (0.08V). Thus, the earnings per share before the refinancing is: EPSB = 0.08V/N After the refinancing the operating profit is still E and the number of shares is (0.5 ´ N). Interest on the debt is 5% of the value of the debt, which is (0.5 ´ V). Thus, the earnings per share after...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online