Solutions to Chapter 1

Expected earnings per share = P/E = $10/$1.25 = 8. With leverage, there are 75,000 shares outstanding: Expected earnings per share = P/E = $10/$1.333 = 7.5. P/E decreases because the equity is now riskier. Although earnings per share are expected to rise from $1.25 to $1.333, the value of each share of equity is no higher. ................
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