What is the expected residual earnings

Reference no: EM131491187

Question: Growth, the Cost of Capital, and the Normal P/E Ratio (Hard) Box 14.5 in this chapter demonstrated how increases in leverage can increase earnings-pershare growth. Suppose the leverage change was due to a stock repurchase where the repurchase was :financed by the borrowing. Answer the following questions regarding the effect of the stock repurchase.

a. Why does the stock repurchase have no effect on the per-share value of the equity?

b. Why does forecasted earnings for Year 1 decrease from $10.00 million to $7.50 million?

c. Why does forecasted EPS for Year I increase while forecasted earnings decrease?

d. The required return prior to the stock repurchase was 10 percent. What is the required return for the equity after the stock repurchase ?

e. What is the expected residual earnings (on equity) for Year 1 after the repurchase?

f. Forecast the value of the equity at the end of Year 1 for both the case with no leverage and the case with leverage.

g. Forecast the PIE at the end of Year 1 for both the case with no leverage and the case with leverage. Why are they different?

Reference no: EM131491187

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