Capital Structure Fallacies

Yerba Industries is an all$-$equity firm whose stock has a beta of $0\mathrm{.}90$ and an expected retum of

$16\mathrm{.}5\%.$ Suppose it issues new risk$-$free debt with a $6\%$ yield and repurchases $55\%$ of its stock.

Assume perfect capital markets.

a$.$ What is the beta of Yerba stock after this transaction?

b$.$ What is the expected retum of Yerba stock after this transaction?

c$.$ Suppose that prior to this transaction, Yerba expected eamings per share this coming year of

$$5,$ with a forward $\frac{P}{E}$ ratio $($that is$,$ the share price divided by the expected earnings for the

coming year$)$ of $9.$