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 $1.1 million. The cost of debt is 5.1%, and the

image text in transcribed
Buggins incorporated is financed equally by debt and equity, each with a market value of $1.1 million. The cost of debt is 5.1%, and the cost of equity is 10.1%. 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 $275,000 issue of debt and uses the proceeds to repurchase equity. The cost of debt is rising now to 5.6% and the cost of equity to 11.43%. Assume the firm pays no taxes. a. How much debt does the company now have? Note: Enter your Answer in Dollars. b. How much equity does it now have? Note: Enter your Answer in Dollars. c. What is the overall cost of capital? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 1decimal place. d. 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. e. 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_2

Step: 3

blur-text-image_3

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 Finance Theory And Policy

Authors: Paul R. Krugman, Maurice Obstfeld, Marc Melitz

11th Global Edition

1292238739, 978-1292238739

More Books

Students also viewed these Finance questions