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. 4. What is the percentage increase in earnings per share after the refinancing? 5. What is the new price-earnings multiple? (Hint: Has anything happened to the stock price?)
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. 4. What is the percentage increase in earnings per share after the refinancing? 5. What is the new price-earnings multiple? (Hint: Has anything happened to the stock price?)
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.
4. What is the percentage increase in earnings per share after the refinancing?
5. What is the new price-earnings multiple? (Hint: Has anything happened to the stock price?)
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