Brooklyn Bagel is an all equity firm that is planning an expansion into the other

boroughs. Prior to the expansion its perpetual expected earning is $$20$ million and it has

$10$ million outstanding shares. Assume all earning are paid as dividends. The expansion

is expected to cost $$20$ million and will add to annual earning $$5$ million in perpetuity.

The expansion carries the same risk as the current business. Current required rate on

equity is $10\%.$ Assume no taxes.

a$.$ Construct BB market value balance sheet and compute the share price.

b$.$ If they decide to follow through with the expansion and finance it with equity:

Construct BB market value balance sheet after the announcement only and

compute the new share price.

How many shares do they need to issue?

Construct BB market value balance sheet after the equity issue but before the

investment.

Construct BB market value balance sheet after the investment is made.

What is the value of $BB?$

c$.$ Suppose they decide to borrow the $$20$ million at a cost of $8\%.$

Construct BB market value balance sheet after the announcement only and

compute the new share price.

Construct $BB$ market value balance sheet after the debt issue but before the

investment.

Construct BB market value balance sheet after the investment is made.

What is the value of $BB?$

Calculate the equity required rate of return after the debt issue and the launch of

the new investment.

Compute the weighted average cost of capital after the debt issue and the launch

of the new investment.