Determine the expected return of equity

Reference no: EM1355951

Hardmon Enterprises is currently an all-equity firm with an expected return of 12%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares.

a. Suppose instead Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost capital is 6%. What will the expected return of equity be after this transaction?

b. Suppose instead Hardmon borrows to the point that its debt-equity ratio is 1.50. With this amount of debt, Hardmon's debt will be much risker. As a result, the debt cost capital will be 8%. What will the expected return of equity be in this case?

Reference no: EM1355951

Questions Cloud

Explain and contrast two or three aggregate plans : Explain and contrast two or three aggregate plans for companies with tangible products against aggregate plans for companies with nontangible products.

What role to assign to four workstations : What role (or roles) would you assign to each of the four workstations and any other equipment you recommend? What type of upgrades, if any, might the workstations require to make your solution work?

Major dsm iv-tr categories : Define the major DSM IV-TR categories of eating, substance abuse, sex/gender/sexual, and personality disorders.

Suggest best one from an overall cost perspective : The CEO has been planning the option of licensing a regional manufacturer. However, since he invented the technology, he is very concerned about how to structure such an agreement in order to fully protect the intellectual property.

Determine the expected return of equity : Hardmon Enterprises is currently an all-equity company with an expected return of 12 percent. It is planning a leveraged recapitalization in which it would borrow and repurchase existing shares.

Research and statistics in clinical psychology : The differences between clinical psychology and other mental health professions (i.e. social worker, psychiatry, school psychology, etc).

Explain these considerations specifically in the context : Explain these considerations specifically in the context of situations related to multinational corporations.

Explain how might you decide whether mundell-tobin effect : This deviation from the classical dichotomy and the Fisher effect is called the Mundell-Tobin effect. Explain how might you decide whether the Mundell-Tobin effect is important in practice.

Develope a tutoring software for an elementary school : You are the project manger for a company that is planning to develope a tutoring software for an elementary school that will follow their curriculum create a work breadown structure.

User Account

All Pages