ABC Corp. is financed entirely by common stock and has a beta of 1.0. The firm...

ABC 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 cost of equity of 12.5%. The company's stock is

selling for $50. Now the firm decides to repurchase half of its shares and

substitute an equal value of debt. The debt is risk-free, with a 5% interest rate.

The company is exempt from corporate income taxes. Assuming MM are correct,

calculate the following items after the refinancing:

The cost of equity.
The overall cost of capital (WACC).
The price–earnings ratio.
The stock price.
The stock's beta.

Please show work

Expert Solution

The cost of equity. = 20%
The overall cost of capital (WACC). = 12.5%
The price–earnings ratio. = 5
The stock price. = 50 $
The stock's beta.=2

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Thank you !!!!

jeff jeffy answered 2 years ago

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