Purchase Solution

Nikita Inc tradition of financing operations with equity issues

Not what you're looking for?

Ask Custom Question

See attached file.

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).

Attachments
Purchase this Solution
Solution Summary

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

Solution Preview

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 ...

Purchase this Solution
Free BrainMass Quizzes
Introduction to Finance

This quiz test introductory finance topics.

Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.

Writing Business Plans

This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.

Basic Social Media Concepts

The quiz will test your knowledge on basic social media concepts.

Transformational Leadership

This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.

View More Free Quizzes
Related BrainMass Solutions

  • Sources of Funds for Nike Inc

    This implies that Nike has been aggressive in financing its assets and operations through equity financing (96%) rather than debt financing which is only 4% of the capital structure.

  • Faith's Fine Furniture Corporation and Faye's Fashions

    E2-10 Inferring Investing and Financing Transactions and Preparing a Balance Sheet: L02, L04, L05 During its first month of operations, March 2006, Faye's Fashions, Inc., completed four transactions with the dollar effects indicated in the following

  • PetSmart, Inc

    This sets the outside limit up to which equity can be used by PetSmart for financing its future operations.

  • ROCE: Solar, Inc. has financial leverage of 36.0% and a net

    Solar, Inc. is considering repurchasing $120 million of its stock and financing the repurchase with further borrowing at a 5% after-tax borrowing cost.

  • Capital Structure Decision and Cost of Capital

    A firm uses different types of financing to pursue its goals and for smooth operations. The combination of different financing options is called capital structure and consists of long-term debt, preferred stock, and net worth.

  • Financial Statements under Two Financing Alternatives

    Yes, apart from the risk associated with a firm's fundamental operations, risk can be introduced by the use of financial instruments with fixed payments, more commonly known as debt. The firm issues debt, which changes its WACC, which changes value.

  • Use debt or equity for better ROE

    336105 Use Debt or Equity for Better ROE Jenny Yu, the owner of the Honey Coffee Shop chain, has decided to expand her operations. Her 2007 financial statements follow.

  • debt financing vs equity financing

    Therefore, the decision to stick to equity financing and forgo debt financing was in lines with the ongoing tradition of the company to utilize equity capital for financing operations.

  • Accounting

    E2-10 Inferring Investing and Financing Transactions and Preparing a Balance Sheet: L02, L04, L05 During its first month of operations, March 2006, Faye's Fashions, Inc., completed four transactions with the dollar effects indicated in the following

View More Related Solutions