Spam Corp. is financed entirely by common stock and has a beta of 1.63. The firm is expected to generate a level, perpetual stream of earnings and dividends. The stock has a price-earnings ratio of 7.80 and a cost of equity of 12.82%. The company’s stock is selling for $32. Now the firm decides to repurchase half of its shares and substitute an equal value of debt. The debt is risk-free, with an interest rate of 5%. The company is exempt from corporate income taxes. Assume MM are correct.

a. Calculate the cost of equity after the refinancing. (Enter your answer as a percent rounded to 2 decimal places.)

Cost of equity             %  

b. Calculate the overall cost of capital (WACC) after the refinancing. (Enter your answer as a percent rounded to 2 decimal places.)

Cost of capital             %

c. Calculate the price-earnings ratio after the refinancing. (Round your answer to 2 decimal places.)

Price-earnings ratio            

d. Calculate the stock price after the refinancing. (Round your answer to the nearest whole number.)

Stock price            $

e. Calculate the stock’s beta after the refinancing. (Round your answer to 1 decimal place.)

Stock's beta            

Answer rating: 100% (QA)

Capital Structure Changes for Spam Corp We can analyze the impact of the capital structure change stock repurchase and debt issuance on Spam Corps fin... View the full answer