Problem:
Stock beta for Beckman Engineering and Associates (BEA) is 1.2 and an expected return of 12.5%. BEA is an all-equity company. BEA's expected earnings per share this coming year $1.50, with forward P/E ratio of 14. Suppose BEA issues new risk-free debt with 5% yield and repurchases 40% of its stock. Assume perfect capital markets:
a. What is the beta of BEA stock after the stock repurchase?
b. What is the expected return of BEA stock after stock repurchase?
c. What is the expected earnings per share of BEA stock after stock repurchase?
d. What is the forward P/E ratio of BEA stock after this transaction?