Macbeth Spot Removers is entirely equity financed. Use the following information. Data Number of shares 1,000 Price per share $ 10 Market value of shares $ 10,000 Expected operating income $ 1,500...

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Macbeth Spot Removers is entirely equity financed. Use the following information.




























Data

Number of shares
1,000

Price per share
$10

Market value of shares
$10,000

Expected operating income
$
1,500










Macbeth now decides to issue $5,000 of debt and to use the proceeds to repurchase stock. Suppose that Ms. Macbeth's investment bankers have informed her that since the new issue of debt is risky, debtholders will demand a return of 12.5%, which is 2.5% above the risk-free interest rate.













a.

Recompute the return of assets (rA
) and return on equity (rE
)?
(Do not round intermediate calculations. Round your answers to 3 decimal places.)

















Return on assets


Return on equity












b.

Suppose that the beta of the unlevered stock was .6. New capital structure is 50% debt financed. What will ß
A
, ß
E
, and ß
D

be after the change to the capital structure?
(Round your answers to 1 decimal place.)





















Asset beta


Debt beta


Equity beta



Answered Same DayDec 25, 2021

Answer To: Macbeth Spot Removers is entirely equity financed. Use the following information. Data Number of...

David answered on Dec 25 2021
123 Votes
1

Solution
Given data
Part a
 Return on asset can be calculated as highlighted below:
= Total net income / Total number of assets
Total net income = {1500 – (12.5% *5000)}
Total number of assets = (10000+5000)
Hence,
=875 / 15000
=0.058
Therefore, the return on asset is 0.058.
 Return on equity can be calculated as highlighted below:
= Total net income /...
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