Hardmon Enterprises is currently an all-equity firm with an expected return of 15%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares. (Assume perfect capital markets.) a. Suppose Hardmon borrows to th
Hardmon Enterprises is currently an all-equity firm with an expected return of . It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares. (Assume perfect capital markets.)
a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost of capital is . What will the expected return of equity be after this transaction?
b. Suppose instead Hardmon borrows to the point that its debt-equity ratio is 1.50. With this amount of debt, Hardmon's debt will be much riskier. As a result, the debt cost of capital will be . What will the expected return of equity be in this case?
c. A senior manager argues that it is in the best interest of the shareholders to choose the capital structure that leads to the highest expected return for the stock. How would you respond to this argument?
Homework Answers
C)Answer: False, returns are higher because risk is higher and the return fairly compensates for the risk.
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Hardmon Enterprises is currently an all-equity firm with an expected return of 15%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares. (Assume perfect capital markets.) a. Suppose Hardmon borrows to th
Hardmon Enterprises is currently an all-equity firm with an expected return of 14.3%. It is considering...
Hardmon Enterprises is currently an all-equity firm with an expected return of 14.3%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares. Assume perfect capital markets. a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost of capital is 4%. What will be the expected return of equity after this transaction? b. Suppose instead Hardmon borrows to the point that its debt-equity ratio...
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rdmon Enterprises is currently an all-equity firm with an expected return of 3.5% t is considering a leveraged recapitalization in which would borrow and repurchase existing shares. Assume perfect capital markets. a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50 with this amount of debt, the debt cost of capital is 6%. What will be the expected return of equity after this transaction? b. Suppose instead Hardmon borrows to the point that its debt-equity ratio is...
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Hardmon Enterprises is currently an all-equity firm with an expected return of 12%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares. a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost of capital is 5%. What will the expected return of equity be after this transaction? b. Suppose instead Hardmon borrows to the point that its debt-equity ratio is 1.50. With this...
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Yerba Industries is an all-equity firm whose stock has a beta of 0.60 and an expected return of 20%. Suppose it issues new risk-free debt with a 6% yield and repurchase 5% of its stock. Assume perfect capital markets. 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 $3.00, with a forward P/E ratio (that is, the share price...
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Yerba Industries is an all-equity firm whose stock has a beta of 0.60 and an expected...
Yerba Industries is an all-equity firm whose stock has a beta of 0.60 and an expected return of 13 %. Suppose it issues newrisk-free debt with a 6 % yield and repurchase 10 % of its stock. Assume perfect capital markets. a. What is the beta of Yerba stock after this transaction? b. What is the expected return of Yerba stock after thistransaction? Suppose that prior to this transaction, Yerba expected earnings per share this coming year of $ 0.50,...
Hardmon Enterprises is currently an all-equity firm with an expected return of 14.3%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares. Assume perfect capital markets. a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost of capital is 4%. What will be the expected return of equity after this transaction? b. Suppose instead Hardmon borrows to the point that its debt-equity ratio...
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Hector Enterprises is currently financed with all equity, and its cost of equity capital is 15% debt, and using the money raised through the debt issue to repurchase some of the outstanding shares of common stock. Assume perfect markets A. Suppose Hector issues debt to the point that its debt-equity ratio is .50 What would be Hector's new cost of equity capital? Hector is considering issuing The debt would then have a market yield of 5%.
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