In: Finance
Knarfappaz Co. pays no taxes and is financed entirely by common stock. The stock has a beta of 0.8 and a price-earnings ratio of 12.5 and is priced to offer an 8% expected return. Knarfappaz now decides to repurchase half the common stock and substitute an equal value of debt. If the debt yields a riskfree 5%, calculate: A. The beta of the common stock after the refinancing; B. The required return and risk premium on the stock before the refinancing; C. The required return and risk premium on the stock after the refinancing; D. The required return on the debt; E. The required return on the company (i.e., stock and debt combined) after the refinancing. Assume that the operating profit of the firm is expected to remain constant in perpetuity. Give: F. The percentage increase in expected earnings per share; G. The new price/earnings ratio (P/E).