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Cost of equity if the debt-to-equity ratio

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a. Vodafone Plc is financed entirely by common stock that is priced to offer a 18 percent expected return. If the company repurchases 25 percent of the common stock and substitutes an equal value of debt yielding 8 percent, what is the expected return on the common stock after refinancing? (Ignore taxes.)

b. Vodafone Plc is financed entirely by common stock that is priced to offer a 18 percent expected return. The common stock price is £15.56/share. The earnings per share (EPS) is expected to be £2. If the company repurchases 25 percent of the common stock and substitutes an equal value of debt yielding 6 percent, what is the expected value of earnings per share after refinancing? (Ignore taxes.)

c. A firm has a debt-to-equity ratio of 1. Its levered cost of equity is 16 percent, and its cost of debt is 8 percent. If there were no taxes, what would be its cost of equity if the debt-to-equity ratio were zero?

Reference no: EM132766296

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