1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 A B Problem 14-21 Yerba Industries is an all-equity firm whose stock has a beta of 1.2 and an expected return of 12.5%. Suppose it issues new risk-free debt with a 5% yield and repurchases 40% of its stock. Assume perfect capital markets. Complete the steps below using cell references to given data or previous calculations. In some cases, a simple cell reference is all you need. To copy/paste a formula across a row or down a column, an absolute cell reference or a mixed cell reference may be preferred. If a specific Excel function is to be used, the directions will specify the use of that function. Do not type in numerical data into a cell or function. Instead, make a reference to the cell in which the data is found. Make your computations only in the blue cells highlighted below. In all cases, unless otherwise directed, use the earliest appearance of the data in your formulas, usually the Given Data section. a. What is the beta of Yerba stock after this transaction? b. What is the expected return of Yerba stock after this transaction? Suppose that prior to this transaction, Yerba expected earnings per share this coming year of $1.50, with a forward P/E ratio (that is, the share price divided by the expected earnings for the coming year) of 14. Unlevered beta Expected return Risk-free rate New debt level D New Debt/Equity Market risk premium c. What is Yerba's expected earnings per share after this transaction? Does this change benefit shareholders? Explain. d. What is Yerba's forward P/E ratio after this transaction? Does the P/E ratio go up or down? New beta 14-21 F a. What is the beta of Yerba stock after this transaction? (+) G 1.20 12.50% 5.00% 40.00% H J K L M N O P Q R S T U 19 20 21 22 23 24 25 26 27 A B a. What is the beta of Yerba stock after this transaction? New beta 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 Requirements b. What is the expected return of Yerba stock after this transaction? New expected return on equity Suppose that prior to this transaction, Yerba expected earnings per share this coming year of $1.50, with a forward P/E ratio (that is, the share price divided by the expected earnings for the coming year) of 14. c. What is Yerba's expected earnings per share after this transaction? Does this change benefit shareholders? Explain. Old EPS Forward P/E Assumed shares Price per share Old equity New debt New earnings New equity New shares New EPS New P/E Price/Earnings ratio d. What is Yerba's forward P/E ratio after this transaction? Does the P/E ratio go up or down? 14-21 F $1.50 14 100 completed G H J K L M N O P Q R S T U