Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 17, Problem 2PS
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.
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1. Company X is interested in calculating its weighted-average cost of capital. Company X has a current financial structure that is composed of 50% debt, 40% ordinary shares, and 10% preference shares. Ignore the effects of cost of retained earnings. The beta of Company X shares is 0.7, and the current risk-free rate of return is 4%. The market risk premium is 6%. The dividend on Company X preference shares is set at P2.25, and the net issuance price per share (which happens to be the same as the current price per share) of preference shares is P30. Debt issued by Company C yields an 11% stated interest rate to investors. The marginal tax rate for Company X is 40%. What is the weighted-average cost of capital for Company X?
7
Makeover Inc. believes that at its current stock price of P16.00 the firm is undervalued in the market. Makeover plans to repurchase 3.4 million of its 20 million shares outstanding. The firm’s managers expect that they can repurchase the entire 2.4 million shares at the expected equilibrium price after repurchase. The firm’s current earnings are $44 million. If management’s assumptions hold, what is the expected per-share market price after repurchase?
Group of answer choices
P24.40
P18.18
P19.28
P17.26
P19.27
P20.00
P16.00
P20.02
Chapter 17 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 17 - Homemade leverage Ms. Kraft owns 50,000 shares of...Ch. 17 - MM proposition 2 Spam Corp. is financed entirely...Ch. 17 - Prob. 3PSCh. 17 - Corporate leverage Suppose that Macbeth Spot...Ch. 17 - MMs propositions True or false? a. MMs...Ch. 17 - MM proposition 2 Look back to Section 17-1....Ch. 17 - Prob. 8PSCh. 17 - Homemade leverage Companies A and B differ only in...Ch. 17 - Prob. 10PSCh. 17 - Prob. 11PS
Ch. 17 - MM proposition 1 Executive Cheese has issued debt...Ch. 17 - MM proposition 2 Hubbards Pet Foods is financed...Ch. 17 - Prob. 14PSCh. 17 - MMs propositions What is wrong with the following...Ch. 17 - Prob. 16PSCh. 17 - Prob. 17PSCh. 17 - MM proposition 2 Imagine a firm that is expected...Ch. 17 - MM proposition 2 Archimedes Levers is financed by...Ch. 17 - Prob. 20PSCh. 17 - Prob. 21PSCh. 17 - Prob. 22PSCh. 17 - Prob. 23PSCh. 17 - Investor choice People often convey the idea...Ch. 17 - Investor choice Suppose that new security designs...
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