Data Case:
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:
Problem 1: What is the beta of BEA stock after the stock repurchase?
Problem 2: What is the expected return of BEA stock after stock repurchase?
Problem 3: What is the expected earnings per share of BEA stock after stock repurchase?
Problem 4: What is the forward P/E ratio of BEA stock after this transaction?
Suppose BEA plan to raise $60 million to fund an expansion by issuing new shares. With the expansion, BEA expects earnings next year of $8 million. BEA currently has 3 million shares outstanding, with a price of $30 per share.
Problem 5: If BEA raises the $60 million by selling new shares, what will the forecast for next year’s earnings per share be?
Problem 6: What will the BEA’s forward P/E ratio be if it issues new equity?
Suppose BEA rejects the initial plan of repurchasing 40% of its stock by issuing new risk-free debt with 5% yield. BEA is now contemplating to raise $60 million to fund expansion by issuing new debt.
Problem 7: If BEA raises the $60 million by issuing new debt with an interest rate of 5%, what will the forecast for next year’s earnings per share be?
Problem 8: What will the BEA’s forward P/E ratio be if it issues debt?
Problem 9: According to your analysis what is the best course of action for BEA? Explain in detail.
Must show all necessary data points, equations and computations accurately.