Buggins Inc. is financed equally by debt and equity, each with a market value of $1 million. The cost of debt is 5%, and the cost of equity is 10%. The company now makes a further $250,000 issue of debt and uses the proceeds to repurchase equity. This causes the cost of debt to rise to 5.5% and the cost of equity to rise to 10.83%. Assume the firm pays no taxes. 1. How much debt does the company now have? 2. How much equity does it now have? 3. What is the overall cost of capital?
Buggins Inc. is financed equally by debt and equity, each with a market value of $1 million. The cost of debt is 5%, and the cost of equity is 10%. The company now makes a further $250,000 issue of debt and uses the proceeds to repurchase equity. This causes the cost of debt to rise to 5.5% and the cost of equity to rise to 10.83%. Assume the firm pays no taxes. 1. How much debt does the company now have? 2. How much equity does it now have? 3. What is the overall cost of capital?
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter17: Dynamic Capital Structures And Corporate Valuation
Section: Chapter Questions
Problem 2P
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Buggins Inc. is financed equally by debt and equity, each with a market value of $1 million. The cost of
debt is 5%, and the
uses the proceeds to repurchase equity. This causes the cost of debt to rise to 5.5% and the cost of equity
to rise to 10.83%. Assume the firm pays no taxes.
1. How much debt does the company now have?
2. How much equity does it now have?
3. What is the overall cost of capital?
4. What is the percentage increase in earnings per share after the reÖnancing?
5. What is the new price-earnings multiple? (Hint: Has anything happened to the stock price?)
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