Assume perfect capital markets. Roche Technology's stock has a beta of 1.2 and has an expected return
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Question:
Assume perfect capital markets. Roche Technology's stock has a beta of 1.2
and has an expected return of 12.5%. It is a zero-debt firm. Suppose it issues new risk-
free debt with a cost of debt of 5% and simultaneously repurchases 40% of its stock.
a. What is the cost of equity of Roche Technology stock after this transaction?
Suppose that prior to this transaction, Roche Technology expected EPS this coming
year of $1.50, with a forward P/E ratio of 14 (note that a forward P/E ratio is the share
price divided by the expected earnings for the coming year).
b. What is Roche Technology's expected earnings per share after this transaction?
Does this change benefit shareholders?
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