Question

Best Bagels, Inc. (BB) currently has zero debt. Its earnings before interest and taxes (EBIT) are $130,000, and it is a zero growth company. BB’s current cost of equity is 13%, and its tax rate is 25%. The firm has 30,000 shares of common stock outstanding selling at a price per share of $25.

Refer to the data for Best Bagels, Inc. (BB). Now assume that BB is considering changing from its original capital structure to a new capital structure with 40% debt and 60% equity. This results in a weighted average cost of capital equal to 11.7% and a new value of operations of $833,333. Assume BB raises $333,333 in new debt and purchases T-bills to hold until it makes the stock repurchase. What is the stock price per share immediately after issuing the debt but prior to the repurchase?

a. $20.65
b. $25.00
c. $18.58
d. $27.78
e. $30.19

Answer 1

d. $27.78

Step-by-step explanation:

The computation of the stock price per share is shown below:

= New value of operations ÷ common stock outstanding shares

= $833,333 ÷ 30,000 shares

= $27.78

Simply we divide the new value of operations or the equity value by the common stock outstanding shares so that the correct stock price per share can come

All other information which is given is not relevant. Hence, ignored it