Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Ponion Boy Inc. (PB) has a total market value of $400 million, consisting of 12 million shares of common stock selling for $25 per share

Ponion Boy Inc. (PB) has a total market value of $400 million, consisting of 12 million shares of common stock selling for $25 per share and $100 million of 8 percent perpetual bonds currently selling at par.PB pays out all earnings as dividends, and its marginal tax rate is 35 percent.The firm's earnings before interest and taxes (EBIT) are $45 million.Management is considering increasing PB's debt until its capital structure has 65 percent debt, based on market values.The additional funds will be used to repurchase stock at the new equilibrium price.At the new capital structure, PB's cost of debt is estimated at 13.5 percent and its cost of equity is estimated to be 14.85 percent.

What is PB's weighted average cost of capital at its new capital structure? Please show all work

a. 8.25%

b. 8.553%

c. 9.89%

d. 9.25%

e. 10.90%

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

Multinational Business Finance

Authors: David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett

15th edition

134796551, 134796550, 978-0134796550

More Books

Students also viewed these Finance questions

Question

How does Mercks value system fit into this decision? lop5

Answered: 1 week ago