Company is financed entirely through common stock

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Reference no: EM132002080

A company is financed entirely through common stock and has a beta of 1.0. The stock has a P/E ratio of 10.0 and is priced to offer a 10% return. The company plans to issue debt and repurchase half the shares. The debt has a risk-free rate of 5% per annum. The company pays no taxes. EBIT remains constant before and after the issuance of debt and share repurchase. Calculate the following:

(a) The beta of the common stock after the refinancing.

(b) The required return and the risk premium on the common stock before the refinancing?

(d) The required return on the debt.

(e) The required return on the company (i.e., both debt and equity) after the refinancing.

(f) The increase in EPS after the refinancing.

(g) The new P/E ratio after the refinancing.

Reference no: EM132002080

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