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3. Omega Manufacturing has an all equity capital structure with a beta of 3.0. Omegas...

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Finance

3. Omega Manufacturing has an all equity capital structure with a beta of 3.0. Omegas expected return on equity is 20.0%. Omega issues risk-free debt with a 5% yield. Omega uses the money to repurchase 30% of its stock. Assume perfect capital markets. Show all calculations. (10 pts) a. What is the beta of Omegas stock after the share repurchase? b. What is the expected return on equity? c. Now assume that earnings for the next year were projected to be $5.00 per share before the buyback was announced and Omegas 12-month forward P/E was projected to be 12 (the forward P/E ratio is ratio of the stock price to next years expected earnings). i. What are earnings per share after the buyback? ii. Does the benefit to shareholders change? Why or why not? iii. What is Omegas P/E after the buyback? Discuss why it has changed.

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