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Suppose an unlevered firm with the following data:

Number of outstanding shares, N0 = 10 million

Share price, P0 = $10.00

The company cash flow at the end of the year depends on the market conditions as follows:

State of the economy Probability Cash flow in million USD Market return

Good---------------------- 60%--------- 130-------------------- 20%

Bad------------------------ 40%--------- 80---------------------- -8%

Assume the CAPM holds. Calculate the unlevered beta and risk-free rate.

Now, suppose the company plans to issue debt to buy back shares as follows:

The present value of debt, D = $60.00 million. Is the debt risk-free?

How many shares will the company be able to buy back?

Calculate the beta and cost of capital of levered equity.

Financial Management, Finance

  • Category:- Financial Management
  • Reference No.:- M92833612

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