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Finance Help! Expected Returns?
Earn and Learn Company is financed entirely by Common stock which is priced to offer a 20% expected return. If the company repurchases 50% of the stock and substitutes an equal value of debt yielding 8%, what is the expected return on the common stock after refinancing?
I don't see how to get the correct answer to this, any thoughts please.
2 Answers
- Don GLv 71 decade agoFavorite Answer
Assume present funding is $1,000,000 of Common Stock. A return of 20% = $200,000. Now buy back $500,000 of Common and issue same in 8% Bonds. Bond interest of $40,000 reduces return from $200,000 to $160,000. But the rate of return to Common is now $160,000 / $500,000 or 32%.
- Anonymous5 years ago
I have been browsing the internet more than 2 hours today seeking the answers to the same question, yet I haven't found any interesting debate like this. It's pretty worth enough for me.
