The Q Company is carrying $1,000,000 worth of debt at a cost of debt (rd) of 5%. Q has 100% payout ratio and has zero growth expected. Its current EBIT is $1 million, and its tax rate is 40%, and its cost of equity (rs) is 7%. The firm has 1,000,000 shares of common stock.

What is Qs current stock price?

The CFO is currently evaluating a project which would have the firm buy back the old debt by issuing $1.5 million worth of new debt to replace the old debt and buy back stock. The new debt would have a cost of 8% and would increase the cost of equity to 10%.

What is the new stock price? And should they do the buy back?