This is Question 1

Bangalore Bread is an Indian producer of breads and other baked goods. Over the past year, profitability has been strong, and the share price has risen from 15 rupees per share to 25 rupees per share. Financial analysts (who generate projections in rupees) expect the profit growth to continue. The company has 20 million shares outstanding. Its borrowing is conservative; the company has only 100 million rupees in debt. The debt trades at a yield to maturity 50 basis points above Indian risk-free bonds. Bangalore Bread has a market beta of 0.7. If the Indian risk-free rate is 7 percent, the market risk premium is 5 percent, and the marginal tax rate is 30 percent, what is Bangalore Breads cost of capital? (Assume that the current capital structure is the target capital structure going forward.)

Question 2

Bangalore Bread is now considering a leverage recapitalization of the company. Upon announcement, management expects the share price to rise 10 percent. If the comaony rises 200 million rupees in new debt to repurchase shreas, how many shares can the company repurchase? Assuming management will activly manage to the new capital structure, estimate its new market beta. If the interest rate on the company's debt rises to 100 basis points above the Indian risk-free rate, what will its new cost of capital equal? (Assume a debt beta of zero and that the beta of the tax shildes will equal the beta of the unlevered firm. How high would the company's interest rate have to rise in order for the cost of capital to be the same as in question 1?