Exhibit 16.1
Pennewell Publishing Inc. (PP) is a zero growth company. It currently has zero debt and its earnings before interest and taxes (EBIT) are $80,000. PP's current cost of equity is 10%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $48.00.
-Refer to Exhibit 16.1.Assume that PP is considering changing from its original capital structure to a new capital structure with 35% debt and 65% equity.This results in a weighted average cost of capital equal to 9.4% and a new value of operations of $510,638.Assume PP raises $178,723 in new debt and purchases T-bills to hold until it makes the stock repurchase.What is the stock price per share immediately after issuing the debt but prior to the repurchase?
A)$45.90
B)$48.12
C)$51.06
D)$53.33
E)$58.75

Question

Quizplus · Accepted Answer

The stock price per share immediately after issuing the debt but prior to the repurchase remains unchanged at $48.00. This is because the action of issuing debt in itself does not immediately affect the stock price. The market value of the firm is determined by its operations, and until the funds from the debt are used (for example, for a stock repurchase), the operation and thus the valuation of the company remain unchanged. Therefore, the stock price stays at $48.00, the price before the debt issuance. However, the correct answer choice based on the provided options is not directly $48.00, indicating a possible misunderstanding in the question's setup or a mistake in the answer choices. Given the options, none directly reflect the unchanged price of $48.00, suggesting a need for clarification or correction in the question or answer choices.

Exhibit 16.1 Pennewell Publishing Inc. (PP) Is a Zero Growth Company. It