Lindy's Accounting Services (LAS) Limited is financed entirely by common stock currently valued at $26 per share and has a beta of 0.9. The company is expected to generate a level, perpetual stream of earnings and dividends. The stock has a price earnings (P/E) ratio of 3 and their cost of equity is 5.2%. LAS now decide to repurchase half of their shares and substitute an equal value of debt which has a beta of 0.7 and has a rate of return of 2.5%. Assume no taxes and that Modigliani and Miller are correct calculate the following under the new capital structure: 

a) The cost of equity

b) The overall cost of capital
c) The stock price 

d) The beta of the stock

Answer rating: 100% (QA)

Financial Implications of LAS Limiteds Decision to Repurchase Half of their Common Stock and Replace it with Debt According to the Modigliani and Mill... View the full answer