1. Find an example of a company that misled the financial markets through their financial statements. How does this happen? What were the repercussions at the company when the truth was revealed?
2. MacBeth Spot Removers is entirely equity financed. Use the following information:Number of shares 1,700 Price per share $24 Market value of shares $40,800 Expected operating income $6,120 Return on assets 15% MacBeth now decides to issue $20,400 of debt and to use the proceeds to repurchase stock.
b. Suppose, additionally, that the beta of the unlevered stock was 0.60. What will βA, βD, and βE be after the capital structure change?
(Hint: use the cost of debt minus 3.2% to get the risk free rate. Use the unlevered beta and the cost of unlevered equity (asset return) and the CAPM to estimate the market risk premium (rm – rf). Then use this market risk premium, the risk free rate and the CAPM formula to back into the other betas.)