Question: Problem 1 6 - 3 Corporate leverage Macbeth Spot Removers is entirely equity financed with values as shown below: Although it expects to have an

Problem 16-3 Corporate leverage
Macbeth Spot Removers is entirely equity financed with values as shown below:
Although it expects to have an income of $1,500 a year in perpetuity, this income is not certain. This table shows the return to
stockholders under different assumptions about operating income. We assume no taxes.
Suppose that Macbeth Spot Removers issues only $3,500 of debt and uses the proceeds to repurchase 350 shares. The interest rate
on the debt is 4%.
a. Calculate the equity earnings, earnings per share, and return on shares for each operating income assumption.
b. If the beta of Macbeth's assets is 0.85 and its debt is risk-free, what would be the beta of the equity after the debt issue?
Problem 16-3 Corporate leverage Macbeth Spot Removers is entirely equity financed

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