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kap26 [50]
3 years ago
13

Best Bagels, Inc. (BB) currently has zero debt. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero gro

wth company. BB's current cost of equity is 13%, and its tax rate is 40%. The firm has 20,000 shares of common stock outstanding selling at a price per share of $23.08. 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 45% debt and 55% equity. This results in a weighted average cost of capital equal to 10.4% and a new value of operations of $576,923. Assume BB raises $259,615 in new debt and purchases T-bills to hold until it makes the stock repurchase. BB then sells the T-bills and uses the proceeds to repurchase stock. How many shares remain after the repurchase, and what is the stock price per share immediately after the repurchase? a. 12,711; $35.62 b. 11,001; $28.85 c. 17,105; $89.67 d. 15,220; $54.31
Business
1 answer:
nevsk [136]3 years ago
4 0

Answer:

b. 11,001; $28.85

Explanation:

EBIT $100,000

zero growth rate

Cost of equity (Re) 13%

tax rate 40%

20,000 common stocks outstanding at $23.08

they want to change from 100% equity to 45% debt and 55% equity

WACC = 10.4%

new value of operations $576,923

PP's value of operations = {$100,000 x (1 - 40%)} / WACC = $576,923

the new stock price should = $576,923 / 20,000 stocks = $28.84615

Stock price will be $28.846

approximately $259,615 / $28.846 = 8,999 stocks should be repurchased

number of stocks remaining after the repurchase = 20,000 - 8,999 = 11,001

total capitalization = $317,308 / 11,001 stocks = $28.84 ≈ $28.85 per stock

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eimsori [14]

It is known as lateral transfer.

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Therefore, the answer is lateral transfer.

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5 0
2 years ago
Transactions for Jayne Company for the month of June are presented below.
sesenic [268]

Answer:

below

Explanation:

3 0
3 years ago
Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends.
sertanlavr [38]

Answer:

$9.687

Explanation:

Given:

Year 3 dividend = $1.00

Year4&5 growth rate = 17%

Constant rate = 7%

Required return rate = 16%

Year 4 dividend wil be:

D4 = 1.00 * 1+growth rate

= 1.00 * (1+0.17)

= $1.17

Year 5 dividend=

D5 = $1.17 * (1+0.17)

= $1.3689

Value of stock after year 5 will be given as:

\frac{D5 * (1+growth rate)}{required return - growth rate}

= \frac{1.3689*(1+0.07)}{0.16-0.07}

= $16.2747

For the current value of stock, we have:

Cv= Fd* Pv of discounting factor

Where Cv = current value of stock

Fd = future dividend

Pv = Present value of discounting factor

Therefore,

C_v = \frac{1.00}{1.16^3} + \frac{1.17}{1.16^4} + \frac{1.3689}{1.16^5} + \frac{16.2746}{1.16^5}

=$9.6871382455

≈ $9.687

The value of stock today =

$9.687

8 0
3 years ago
The market capitalization of this company is $140 million, it's beta is 0.75, the risk free rate is 2% and the market risk premi
tiny-mole [99]

Answer:

Ans. The cost of equity capital is 6.5 (6.5%)

Explanation:

Hi, all we need to do is fill the following equation with the data from the problem.

r(e)=rf+beta*(MRP)

Where:

rf = Risk free rate (in our case, 2%)

MRP = market risk premium (in our case, 6%)

r(e) = Cost of equity capital

Therefore, this is what we get.

r(e)=0.02+0.75*0.06=0.065

So the cost of equity capital is 6.5% or 6.5 as the problem suggests to answer.

Best of luck.

5 0
3 years ago
What is the purpose of a greenfield investment? to acquire an existing firm in a foreign country. to merge with an existing firm
Stels [109]

According to the Bureau of Economic Analysis (BEA), a greenfield investment is a project “where foreign investors establish a new business or expand an existing business on U.S. soil.”

4 0
3 years ago
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