Exhibit 16.1

Pennewell Publishing Inc. (PP) is a zero growth company. It currently has zero debt and its earnings before interest and taxes (EBIT) are $150,000. PP's current cost of equity is 10%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $48.00.

Refer to Exhibit 16.1. Assume that PP is considering changing from its original capital structure to a new capital structure with 60% debt and 40% equity. This results in a weighted average cost of capital equal to 10.4% and a new value of operations of $998,556. Assume PP raises $171,113 in new debt and purchases T-bills to hold until it makes the stock repurchase. How many shares remain after the repurchase

1. 7,998

2. 5,578

3. 5,004

4. 8,285