Reference no: EM132754030

Question - You have run a regression of monthly returns on Atlanta Books Inc. (a newspaper and magazine publisher) against returns on the S&P 500 and arrived at the following result:

RAtlanta = -0.05% + 1.40 × RS&P 500

You now realize that Atlanta Books Inc. went through a major restructuring at the end of last month (which was the last month of your regression) and made the following changes:

The firm sold off its magazine division, which had an unlevered beta of 0.5, for $20 million.

It borrowed an additional $20 million and bought back stock to the value of $40 million.

After the sale of the division and the share repurchase, Atlanta Books Inc. had $40 million in debt and $120 million in equity outstanding (assume that the value of its newspaper division was not affected by the restructuring). Assume that the firm's effective tax rate is 40% and that the values of the divisions as well as the values of debt and equity referred to above are market values.

Required - Based on the information above, answer the following questions:

(a) What was the company's debt to equity ratio before the restructuring?

(b) What was the company's unlevered beta before the restructuring?

(c) What was the company's unlevered beta after the restructuring?

(d) Should stock market investors require a higher return on the company's stock after the restructuring? Assume that the market risk premium and risk-free rate remained the same after the company's restructuring.