Question 20 Best Bagels, Inc. (BB) 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. 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? Remaining shares; Stock price after repurchase a. 20,800; $31.51 b. 19,400; $29.44 c. 21,800; $34.34 d. 23,500; $35.71 e. 18,000; $27.78
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Question 20
Best Bagels, Inc. (BB)
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
Remaining shares; Stock price after repurchase
| a. |
20,800; $31.51
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| b. |
19,400; $29.44
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| c. |
21,800; $34.34
|
|
| d. |
23,500; $35.71
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| e. |
18,000; $27.78
|
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