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    Nikita Inc tradition of financing operations with equity issues

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    Nikita Inc has a tradition of financing all their operations with equity issues. They have no debt in their capital structure. The market return on their equity is currently 14%, slightly below the return on the stock market as a whole, which is 15%. The risk free rate of interest is currently 5%. The share price is $27.50 per share, and the company has 10 million shares outstanding.
    The new management of Nikita Inc has decided to break with the company's tradition and finance 10% of their operations with debt. This would still give the company a AAA credit rating, and the expected return on this debt would equal the risk free rate. The company would issue debt and use all the proceeds to repurchase some of their shares after re-levering. [This means the company's assets do not change, only its capital structure.] show all work

    a) What is the beta of Nikita Inc equity if all values above conform with the CAPM? (the question refers to Nikita Inc before relevering).

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    Nikita Inc has a tradition of financing all their operations with equity issues. They have no debt in their capital structure. The market return on their equity is currently 14%, slightly below the return on the stock market as a whole, which is 15%. The risk free rate of interest is currently 5%. The share price is $27.50 per share, and the company has 10 million shares outstanding.
    The new management of Nikita Inc has decided to break with the company's tradition and finance 10% of their operations with debt. This would still give the company a AAA credit rating, and the expected return on this debt would equal the risk free rate. The company would issue debt and use all the proceeds to repurchase some of their shares after re-levering. [This means the company's assets do not change, only its capital structure.] show all work

    a) What is the ...

    Solution Summary

    The solution examines Nikita Inc.'s traditional view of financing operations with equity issues.

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