5. MM Proposition 2: McLaren 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 cost of equity of 12.5%. The company's stock is selling for $50. The firm decides to repurchase half its shares and substitute an equal value of debt (issue debt and use the proceeds to buy back shares). The debt is riskOfree, with an interest rate of 5%. The company is exempt from corporate income taxes. 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. 2 of 2

5. MM Proposition 2: McLaren 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 cost of equity of 12.5%. The company's stock is selling for $50. The firm decides to repurchase half its shares and substitute an equal value of debt (issue debt and use the proceeds to buy back shares). The debt is riskOfree, with an interest rate of 5%. The company is exempt from corporate income taxes. 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. 2 of 2

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter15: Dividend Policy

Section: Chapter Questions

Problem 8P

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