Macbeth Spot Removers is entirely equity financed. Use the following information. Data Number of...

Question

Macbeth Spot Removers is entirely equity financed. Use the following information.

Data
Number of shares	1,000
Price per share	$	10
Market value of shares	$	10,000
Expected operating income	$	1,500

Macbeth now decides to issue $5,000 of debt and to use the proceeds to repurchase stock. Suppose that Ms. Macbeth's investment bankers have informed her that since the new issue of debt is risky, debtholders will demand a return of 12.5%, which is 2.5% above the risk-free interest rate.

a.	Recompute the return of assets (r_A) and return on equity (r_E)? (Do not round intermediate calculations. Round your answers to 3 decimal places.)

Return on assets
Return on equity

b.	Suppose that the beta of the unlevered stock was .6. New capital structure is 50% debt financed. What will ß_A, ß_E, and ß_D be after the change to the capital structure? (Round your answers to 1 decimal place.)

Asset beta
Debt beta
Equity beta

David · Accepted Answer

1 
 
Solution 
Given data
Part a 
 Return on asset can be calculated as highlighted below: 
 = Total net income / Total number of assets 
Total net income = {1500 – (12.5% *5000)} 
Total number of assets = (10000+5000) 
Hence, 
=875 / 15000 
=0.058  
Therefore, the return on asset is 0.058.
 Return on equity can be calculated as highlighted below:

Macbeth Spot Removers is entirely equity financed. Use the following information. Data Number of shares 1,000 Price per share $ 10 Market value of shares $ 10,000 Expected operating income $ 1,500...

Solution

Answer To This Question Is Available To Download

Related Questions & Answers

Submit New Assignment