*PLEASE ANSWER D AND E, I ANSWERED A/B/C

Increasing financial leverage increases both the cost of debt (r_debt) and the cost of equity (r_equity). So the overall cost of capital cannot stay constant. This problem is designed to show that the speaker is confused. Buggins Inc. is financed equally by debt and equity, each with a market value of $1 million. The cost of debt is 5%, and the cost of equity is 10%. The company now makes a further $250,000 issue of debt and uses the proceeds to repurchase equity. This causes the cost of debt to rise to 5.5% and the cost of equity to rise to 10.83%. Assume the firm pays no taxes.

A. How much debt does the company now have? $1,250,000

B. How much equity does it now have? $750,000

C. What is the overall cost of capital? 7.5%

D. What is the percentage increase in earnings per share after the refinancing? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

E. What is the new price-earnings multiple? (Hint: Has anything happened to the stock price?) (Round your answers to 2 decimal place.