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    Corporate Finance: Data Case

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    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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    https://brainmass.com/business/finance/corporate-finance-data-case-252606

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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

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