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e. What would be the new stock price if Wicks re-capitalized and used these amounts of debt $250,000, $500,000 and $750,000.

Assume you have just been hired as Business Manager of Wick's Pizza. The company's EBIT was $500,000 last year and is expected to remain constant (in real terms) over time. Since no expansion capital will be required, Wick's plans to pay out all earnings as dividends. The management group owns 50 percent of the stock, and the rest is traded in the over-the-counter market. Wick's is currently financed with all equity, has 100,000 shares outstanding and the current price is $20 per share. During the Finance program, it has been stated that most firm's owners would be financially better off if the firms used some debt. When you suggested this to your new boss, she encouraged you to pursue the idea. As a first step you obtained from the firm's investment banker the following estimated costs of debt and equity for Wick's at different debt levels (in thousands of dollars): If Wick's was to re-capitalize, debt would be used, and the funds received would be used to repurchase stock. Wick's is in the 25% state-plus federal tax bracket. a. Briefly explain the trade-offs between debt and equity financing. b. How many shares would remain after re-capitalization under each scenario? 0 - bought 0 outstanding 100,000 250 - bought 12,500 outstanding 87,500(250,000/20=12,500100,00012,500= 87,500) 500 - bought 25,000 outstanding 75,000 750 - bought 37,500 outstanding 62,500 1000 - bought 50,000 outstanding 50,000 c. It is also useful to determine the effect of recapitalization on Earnings Per Share. Calculate the EPS at debt levels of $0,$250,000,$500,000 and $750,000. EPS at debt level $0: EAT / shares =[($500,000($500,000.25)/100,000]=$3.75 EPS at debt level $250:$375,000/75,000=$5 EPS at debt level $500:$375,000/62,500=$6 EPS at debt level $750:$375,000/50,000=$7.5 d. Calculate the firm's WACC at each debt level WACC at 0% debt d. Calculate the firm's WACC at each debt level WACC at 0% debt WACC at 10% debt WACC at 11% debt WACC at 13% debt WACC at 16% debt- e. What would be the new stock price if Wick's re-capitalized and used these amounts of debt $250,000,$500,000 and $750,000