Macbeth Spot Removers is entirely equity financed with values as shown below: Number of shares Data 500 Price per share $ 10 Market value of shares $ 5,000 Market value of debt $ 5,000 $ 500 Interest at 4% Although it expects to have an income of $1,500 a year in perpetuity, this income is not certain. This table shows the return to stockholders under different assumptions about operating income. We assume no taxes. Outcomes Operating income ($) 500 1,000 Interest ($) 500 500 1,500 500 Equity earnings ($) B 500 Earnings per share ($) e Return on shares (%) e 1.00 10 1,000 2.00 20 2,000 500 1,500 3.00 38 Expected outcome Suppose that Macbeth Spot Removers issues only $3,000 of debt and uses the proceeds to repurchase 300 shares. The interest rate on the debt is 4%. a. Calculate the equity earnings, earnings per share, and return on shares for each operating income assumption. b. If the beta of Macbeth's assets is 0.85 and its debt is risk-free, what would be the beta of the equity after the debt issue?
Macbeth Spot Removers is entirely equity financed with values as shown below: Number of shares Data 500 Price per share $ 10 Market value of shares $ 5,000 Market value of debt $ 5,000 $ 500 Interest at 4% Although it expects to have an income of $1,500 a year in perpetuity, this income is not certain. This table shows the return to stockholders under different assumptions about operating income. We assume no taxes. Outcomes Operating income ($) 500 1,000 Interest ($) 500 500 1,500 500 Equity earnings ($) B 500 Earnings per share ($) e Return on shares (%) e 1.00 10 1,000 2.00 20 2,000 500 1,500 3.00 38 Expected outcome Suppose that Macbeth Spot Removers issues only $3,000 of debt and uses the proceeds to repurchase 300 shares. The interest rate on the debt is 4%. a. Calculate the equity earnings, earnings per share, and return on shares for each operating income assumption. b. If the beta of Macbeth's assets is 0.85 and its debt is risk-free, what would be the beta of the equity after the debt issue?
Chapter15: Dividend Policy
Section: Chapter Questions
Problem 4P
Related questions
Question
Note:-
- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism.
- Answer completely.
- You will get up vote for sure.
Transcribed Image Text:Macbeth Spot Removers is entirely equity financed with values as shown below:
Data
Number of shares
500
Price per share
$ 10
Market value of shares
$ 5,000
Market value of debt
$ 5,000
$ 500
Interest at 4%
Although it expects to have an income of $1,500 a year in perpetuity, this income is not certain. This table shows the return to
stockholders under different assumptions about operating income. We assume no taxes.
Outcomes
Operating income ($)
500
1,000
Interest ($)
500
Equity earnings ($)
0
Earnings per share ($)
Return on shares (%)
0
Ө
500
500
1.00
10.
1,500
500
1,000
2.00
20
2,000
500
1,500
3.00
30
Expected
outcome
Suppose that Macbeth Spot Removers issues only $3,000 of debt and uses the proceeds to repurchase 300 shares. The interest rate
on the debt is 4%.
a. Calculate the equity earnings, earnings per share, and return on shares for each operating income assumption.
b. If the beta of Macbeth's assets is 0.85 and its debt is risk-free, what would be the beta of the equity after the debt issue?
Answer is complete but not entirely correct.
Complete this question by entering your answers in the tabs below.
Required A Required B
Calculate the equity earnings, earnings per share, and return on shares for each operating income assumption.
Note: Input all values as a positive number. Round your "Earnings per share" answers to 2 decimal places. Enter your "Return
on shares" answers as a percent rounded to 2 decimal places. Round the other answers to the nearest whole number.
Outcomes
Operating income ($)
500✓
1,000
1,500✓
2,000
Interest
120 ✔
Equity earnings ($)
380✔
120 ✔
880
120
1,380
120
1,880
Earnings per share ($)
1.90 x
4.40 x
6.90 X
9.40 X
Return on shares (%)
0.19 ×
0.44 x
0.69 x
0.94 X
Required A
Required B >
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 4 steps
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Pfin (with Mindtap, 1 Term Printed Access Card) (…
Finance
ISBN:
9780357033609
Author:
Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Pfin (with Mindtap, 1 Term Printed Access Card) (…
Finance
ISBN:
9780357033609
Author:
Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher:
Cengage Learning
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
