Look back to Section 13-1 (Table 13.2 on p. 329). Suppose that Ms. Macbeth's investment bankers have informed her that since the new issue of debt is risky, debt holders will demand a return of 12.5%, which is 2.5% above the risk-free interest rate.a. What are rA and rE?b. Suppose that the beta of the unlevered stock was .6.
What will A, E, and D be after the change to the capital structure? Step 1: Operating income F Market value of shares F Expected return on debt F Number of Shares F Price per share F Market value of shares- new debt F Tip - see sidebar for Table 2 Market value of debt F Formula Calculation a. rA T C TIP: see formulas on p. 331 rE T C Calculation b. ßA F ßE C TIP: calculate E/V and D/V first ßD C Number of shares 500 Price per share $10 Market value of shares $5,000 Market value of debt $5,000 Interest at 10% $500 Operating Income 500 1,000 1,500 2,000 Interest 500 500 500 2,000 Equity earnings 0 500 1,000 1,500 Earnings per shares 0 1 2 3 Return on shares 0 10 20 30