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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.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92837627

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