return on the common stock
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1. J Hennessy Company is entirely financed by common stock and has a beta of 1.2. The stock has a price-earnings multiple of 10 and is priced to offer a 10 percent expected rate of return. The company decides to repurchase half of the common stock and substitute an equal value of debt. Assume that the debt yields a risk-free 5 percent.
a. What is the beta of the common stock after the refinancing?
b. What is the beta of the debt?
c. What is the beta of the entire company (stock plus debt) after the refinancing?
d. What is the required return on the common stock after the restructuring?
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The required return on the common stock after the restructuring is emphasized.
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1. J Hennessy Company is entirely financed by common stock and has a beta of 1.2. The stock has a price-earnings multiple of 10 and is priced to offer a 10 percent expected rate of return. The company decides to repurchase half of the common stock and substitute an equal value of debt. Assume that the ...
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