Schuldenfrei a.g. pays no taxes and is financed entirely by common stock . The stock has a

Question:

Schuldenfrei a.g. pays no taxes and is financed entirely by common stock. The stock has a beta of .8, a price–earnings ratio of 12.5, and is priced to offer an 8 percent expected return. Schuldenfrei now decides to repurchase half the common stock and substitute an equal value of debt. If the debt yields a risk-free 5 percent, calculate

(a) The beta of the common stock after the refinancing.

(b) The required return and risk premium on the stock before 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 multiple.

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...