Indell stock has a current market value of $ 200 million and a beta of 0.90. Indell currently has risk-free debt as well. The firm decides to change its capital structure by issuing $ 95.09 million in additional risk-free debt, and then using this $ 95.09 million plus another $ 16 million in cash to repurchase stock. With perfect capital markets, what will the beta of Indell stock be after this transaction?
Current Market Value: $ 200 million
Beta : 0.90
New Debt: $ 95.09 million
Indell New Capital Structure will be:
Debt: New Debt + Cash = $ 95.09 mn + $ 16 mn = $ 111.09 mn
Equity : Current Market Value - Debt = $ 200 mn - $ 111.09 mn = $ 88.91 mn
Debt is risk free, hence
BetaEquity = Betaunlevered * (1+ D/E) = Betau * ((D+E)/E) = Betau * EV/E
D = Debt, E = Equity , EV = Enterprise Value
Only value of equity has been changed in the above equation
Hence, New BetaEquity = Beta * Eold / Enew = 0.9* 200/88.91 = 2.02
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