Beta after repurchase

QUESTION

Companys shares have a market value of 120 million and a beta of 1.5. It currently has risk-free debt as well. The firm decides to change its capital structure by issuing 30 million in additional risk-free debt, and then using this 30 million to repurchase stock.a) With perf
A) The current beta is 1.5, according to MM the beta has to stay the same of after the repurchase. Equity Debt = 120 (since they dont say a specific amount), where Equity = 120 After repurchase: D/V * Bd E/V *Be = 1.5 30/120 * 0 90/120 *Be = 1.5 90/120 * Be = 1.5 Be = 1.5/(90/120) Be =

0 B) The Beta will stay the same because the firm will repurchase 10 million with cash but the value of the remaining shares will increase by 10 million so therefore the beta will stay the same.

ANSWER:

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