4. Macbeth Spot Removers is entirely equity financed with values as shown below: Data Number of shares 1,800 Price per share $ 18 Market...

50.1K

Verified Solution

Question

Finance

4.
Macbeth Spot Removers is entirely equity financed with values asshown below:
Data
Number of shares 1,800
Price per share $ 18
Market value of shares $ 32,400
Although it expects to have an income of $2,300 a year inperpetuity, this income is not certain. This table shows the returnto stockholders under different assumptions about operating income.We assume no taxes.
Outcomes
Operating income ($) 1,300 1,800 2,300 2,800
Suppose that Macbeth Spot Removers issues only $3,780 of debtand uses the proceeds to repurchase 210 shares. The interest rateon the debt is 10%.
a. Calculate the equity earnings, earnings pershare, and return on shares for each operating income assumption.(Input all values as a positive number. Round your"Earnings per share" answers to 2 decimal places. Enter your"Return on shares" answers as a percent rounded to 2 decimalplaces. Round the other answers to the nearest wholenumber.)
Outcomes
Operating income ($)
Interest
Equity earnings ($)
Earnings per share ($)
Return on shares (%)
b. If the beta of Macbeth's assets is .96 andits debt is risk-free, what would be the beta of the equity afterthe debt issue? (Round your answers to 2 decimalplaces.)
All-equity beta
Debt beta
D/E ratio
Equity beta

Answer & Explanation Solved by verified expert

4.4 Ratings (582 Votes)

a Initial Market value of equity 32400 Debt issued 3780 Market value of equity after debt is issued 32400 3780 28620 No of shares outstanding after debt is issued Initial shares shares repurchased 1800 210 1590 Interest on debt Interest rate x debt issued 10 x 3780 378 We know that Equity Earnings Operating income interest1tax rate As taxes are ignored therefore Equity Earnings Operating income interest Earnings per share Equity earnings No of shares See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

4.Macbeth Spot Removers is entirely equity financed with values asshown below:DataNumber of shares1,800Price per share$18Market value of shares$32,400Although it expects to have an income of $2,300 a year inperpetuity, this income is not certain. This table shows the returnto stockholders under different assumptions about operating income.We assume no taxes.OutcomesOperating income ($)1,3001,8002,3002,800Suppose that Macbeth Spot Removers issues only $3,780 of debtand uses the proceeds to repurchase 210 shares. The interest rateon the debt is 10%.a. Calculate the equity earnings, earnings pershare, and return on shares for each operating income assumption.(Input all values as a positive number. Round your"Earnings per share" answers to 2 decimal places. Enter your"Return on shares" answers as a percent rounded to 2 decimalplaces. Round the other answers to the nearest wholenumber.)OutcomesOperating income ($)InterestEquity earnings ($)Earnings per share ($)Return on shares (%)b. If the beta of Macbeth's assets is .96 andits debt is risk-free, what would be the beta of the equity afterthe debt issue? (Round your answers to 2 decimalplaces.)All-equity betaDebt betaD/E ratioEquity beta

Data
Number of shares		1,800
Price per share	$	18
Market value of shares	$	32,400

	Outcomes
Operating income ($)
Interest
Equity earnings ($)
Earnings per share ($)
Return on shares (%)