XPTO SA is an industrial all-equity financed company, and its shares have a beta of 1,6. The management team expects a good level of earnings and dividends in the following years because of the economic recovery. The company’s equity is represented by 3 million shares. Its shares are listed on the stock exchange. The current price is 8 euros per share. The price-earnings ratio (PER) is 12, above industry PER. The cost of equity is 16%. The management just decided to repurchase 5% of XPTO’s shares and to finance this repurchase with debt. The debt is risk-free at 4%. The company is exempt from corporate income taxes. Assuming MM are correct. a) What will be the cost of equity after this operation? b) What will be the WACC after this operation? c) What will be the new PER? d) What immediate stock price reaction would you anticipate (justify your answer)? e) What will be the new beta? Why will the new beta be different? f) After the repurchase of its own shares, what will be the debt ratio?
XPTO SA is an industrial all-equity financed company, and its shares have a beta of 1,6. The
management team expects a good level of earnings and dividends in the following years because
of the economic recovery. The company’s equity is represented by 3 million shares. Its shares
are listed on the stock exchange. The current price is 8 euros per share. The price-earnings ratio
(PER) is 12, above industry PER. The
The management just decided to repurchase 5% of XPTO’s shares and to finance this repurchase
with debt. The debt is risk-free at 4%.
The company is exempt from corporate income taxes. Assuming MM are correct.
a) What will be the cost of equity after this operation?
b) What will be the WACC after this operation?
c) What will be the new PER?
d) What immediate stock price reaction would you anticipate (justify your answer)?
e) What will be the new beta? Why will the new beta be different?
f) After the repurchase of its own shares, what will be the debt ratio?
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