1. Microsoft has an equity value of $250B, but has only $10B in debt. Management decides...

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1. Microsoft has an equity value of $250B, but has only $10B in debt. Management decides they'd like to increase the D/(D+E) ratio to 40% and use the proceeds to repurchase shares of equity, i.e. a leveraged recapitalization. a. Before the recapitalization, the debt is considered risk-free and the equity has a beta of 1.13; afterwards, the debt beta becomes 0.3. How much debt does Microsoft issue? By how much has this restructuring changed the riskiness of equity in Microsoft, i.e. what is the equity beta after the recapitalization? b. If the risk-free rate is 3% and the expected market return is 9%, what are the expected returns to equity holders before and after the recapitalization? 1. Microsoft has an equity value of $250B, but has only $10B in debt. Management decides they'd like to increase the D/(D+E) ratio to 40% and use the proceeds to repurchase shares of equity, i.e. a leveraged recapitalization. a. Before the recapitalization, the debt is considered risk-free and the equity has a beta of 1.13; afterwards, the debt beta becomes 0.3. How much debt does Microsoft issue? By how much has this restructuring changed the riskiness of equity in Microsoft, i.e. what is the equity beta after the recapitalization? b. If the risk-free rate is 3% and the expected market return is 9%, what are the expected returns to equity holders before and after the recapitalization?

Answer rating: 100% (QA)

1a Before the recapitalization the DDE ratio of Microsoft is DDE DDE EDE 10B 10B 250B 0038 To increa... View the full answer