# Arizona State University FIN FIN 40628 An all equity firm is expected to have earnings per share in perpetuity of \$6.00.The current price is \$50.00 per share, which implies the equity

Arizona State University FIN FIN 40628 An all equity firm is expected to have earnings per share in perpetuity of \$6.00.The current price is \$50.00 per share, which implies the equity

# An all equity firm is expected to have earnings per share in perpetuity

of \$6.00.  The current price is \$50.00 per share, which implies the equity capitalization rate (rE) is 12 percent.  Suppose the firm issues debt and uses the proceeds to buy back stock so that expected earnings per share increase to \$8.00 in perpetuity.  Assuming a world where Modigliani-Miller Proposition I holds, what is (a) the new share price and (b) the new equity capitalization rate (rE)?

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Arizona State University FIN FIN 40628 An all equity firm is expected to have earnings per share in perpetuity of \$6.00.The current price is \$50.00 per share, which implies the equity
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a. The new share price is:
A) 40
B) 50
C) 60
D) Can not tell from the information given
E) 33

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