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Corporate Finance: Data Case

Data Case

Stock beta for Beckman Engineering and Associates (BEA) is 1.2 and an expected return of 12.5%. BEA is an all-equity company. BEA's expected earnings per share this coming year $1.50, with forward P/E ratio of 14. Suppose BEA issues new risk-free debt with 5% yield and repurchases 40% of its stock. Assume perfect capital markets:

a. What is the beta of BEA stock after the stock repurchase?

Ans.: Enter your response here. [Must show accurate formula(s) and computations for full credit.]

b. What is the expected return of BEA stock after stock repurchase?

Ans.: Enter your response here. [Must show accurate formula(s) and computations for full credit.]

c. What is the expected earnings per share of BEA stock after stock repurchase?

Ans.: Enter your response here. [Must show accurate formula(s) and computations for full credit.]

d. What is the forward P/E ratio of BEA stock after this transaction?

Ans.: Enter your response here. [Must show accurate formula(s) and computations for full credit.]

Suppose BEA plan to raise $60 million to fund an expansion by issuing new shares. With the expansion, BEA expects earnings next year of $8 million. BEA currently has 3 million shares outstanding, with a price of $30 per share.

e. If BEA raises the $60 million by selling new shares, what will the forecast for next year's earnings per share be?

Ans.: Enter your response here. [Must show accurate formula(s) and computations for full credit.]

f. What will the BEA's forward P/E ratio be if it issues new equity?

Ans.: Enter your response here. [Must show accurate formula(s) and computations for full credit.]

Suppose BEA rejects the initial plan of repurchasing 40% of its stock by issuing new risk-free debt with 5% yield. BEA is now contemplating to raise $60 million to fund expansion by issuing new debt.

g. If BEA raises the $60 million by issuing new debt with an interest rate of 5%, what will the forecast for next year's earnings per share be?

Ans.: Enter your response here. [Must show accurate formula(s) and computations for full credit.]

h. What will the BEA's forward P/E ratio be if it issues debt?

Ans.: Enter your response here. [Must show accurate formula(s) and computations for full credit.]

i. According to your analysis what is the best course of action for BEA? Explain in detail.

Ans.: Enter your response here.

Must show all necessary data points, equations and computations accurately to earn maximum point.

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Answer:
(a) Given that,
Beta of equity=1.2
Beta of debt=0
Weight of debt=40%
Weight of equity=60%
Hence,

(b) Given that,
Risk free rate, Rf=5%
Expected rate of return before repurchase=12.5%
Beta before repurchase=1.2
So,

Now,
Beta after repurchase=0.72
Hence,

(c) Given that,
Earning ...

Solution Summary

The solution examines stock beta for Beckman Engineering and Associates. The beta of BEA stock after the stock repurchase is determined.

$2.19