Volunteer Fabricators, Inc. (VF) currently has zero debt. It is a zero growth

company, and it has the data shown below. Now the company is considering using

some debt, moving to the market value capital structure indicated below. The

money raised would be used to repurchase stock. It is estimated that the increase

in risk resulting from the additional leverage would cause the required rate of

return on equity to rise somewhat, as indicated below.

EBIT = $80,000 New Debt/Value = 20%

Growth = 0% New Equity/Value = 80%

Orig cost of equity, rs = 10.0% No. of shares = 10,000

New cost of equity = rs = 11.0% Price per share = $48.00

Tax rate = 40% Interest rate = rd = 7.0%

Part I:

If this plan were carried out, what would be VF's new WACC and its new value of

operations?

Part II:

Now assume that VF is considering changing from its original zero debt capital

structure to a new capital structure with even more debt. This results in changes in

the cost of debt and equity, and thus to a new WACC and a new value of

operations. Assume VF raises the amount of new debt indicated below and uses

the funds to purchase and hold T-bills until it makes the stock repurchase. What is

the stock price per share immediately after issuing the debt but prior to the

repurchase?

Debt/Value = 40% Value of new debt = $213,333

Equity/Value= 60% New WACC = 9.0%

Part III:

Based on the data in the previous two parts, what would the stock price be if VF

issued the new debt and immediately used the proceeds to repurchase stock?