. Now assume that BF is considering changing from its original zero debt capital

Question

. Now assume that BF is considering changing from its original zero debt capital structure to a new capital structure with even more debt. This results in changes in the cost of debt and equity, and thus to a new WACC and a new value of operations. Assume BF raises the amount of new debt indicated below and uses the funds to purchase and hold T-bills until it makes the stock repurchase. What is the stock price per share immediately after issuing the debt but prior to the repurchase?

Debt/Value = 40%                 Value of new debt = $247,000
Equity/Value= 60%                 New WACC = 9.3%

a. $27.90
b. $30.05
c. $32.26
d. $35.25
e. $40.20

Explanation / Answer

Now assume that BF is considering changing from its original zero debt capital structure to a new capital structure with even more debt. This results in changes in the cost of debt and equity, and thus to a new WACC and a new value of operations. Assume BF raises the amount of new debt indicated below and uses the funds to purchase and hold T-bills until it makes the stock repurchase. What is the stock price per share immediately after issuing the debt but prior to the repurchase?

Debt/Value = 40% Value of new debt = $247,000
Equity/Value= 60% New WACC = 9.3%

a. $27.90
b. $30.05
c. $32.26
d. $35.25
e. $40.20

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