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
icon
Related questions
Question

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?) 

Expert Solution
steps

Step by step

Solved in 4 steps

Blurred answer
Knowledge Booster
Forecasting Financial Statement
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
Intermediate Financial Management (MindTap Course…
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Corporate Fin Focused Approach
Corporate Fin Focused Approach
Finance
ISBN:
9781285660516
Author:
EHRHARDT
Publisher:
Cengage
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage