The company Noboro has a tradition of financing all their operations with equity offerings. The company has no debt. The expected return on equity is currently 12%, the share price is $25 per share, and the company has 20 million shares outstanding. The expected return on the market portfolio is 14%. The risk-free interest rate is currently 6%. There are no taxes.

The new management of Noboro has decided to break with the company's tradition and finance 25% of their operations with debt. This would still give the company a AAA credit rating and the expected return on this debt would equal the risk-free rate. The company would issue debt and use all the proceeds to repurchase some of their shares.

1. Assuming the CAPM, what is Noboro's equity beta before taking on the debt? 

2. After the company has repurchased the shares and issued debt, what is the expected return on equity? How has this affected the company's cost of capital?

Answer rating: 100% (QA)

J Expected Return on share price is 125 0s shares S 20 mi... View the full answer