Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Buggins Incorporated is financed equally by debt and equity, each with a market value of $ 1 . 5 million. The cost of debt is

Buggins Incorporated is financed equally by debt and equity, each with a market value of $1.5 million. The cost of debt is 5.5%, and the cost of equity is 10.5%. Assume that the initial market value of equity is based on a perpetuity model with full dividend payout (no growth). The company now makes a further $375,000 issue of debt and uses the proceeds to repurchase equity. The cost of debt is rising now to 6.0% and the cost of equity to 13.83%. Assume the firm pays no taxes.
How much debt does the company now have? Note: Enter your Answer in Dollars.
How much equity does it now have? Note: Enter your Answer in Dollars.
What is the overall cost of capital?
Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.
What is the percentage increase in earnings per share after the refinancing?
Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.
What is the new price-earnings multiple?
Note: Round your answers to 2 decimal place.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

International Financial Management

Authors: Geert Bekaert, Robert J. Hodrick

4th International Edition

013284298X, 9780132842983

More Books

Students also viewed these Finance questions