Best Bagels, Inc. (BB) currently has zero debt. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero growth company. BB's current cost of equity is 13%, and its tax rate is 40%. The firm has 20,000 shares of common stock outstanding selling at a price per share of $23.08.
-Refer to the data for Best Bagels, Inc. (BB). Now assume that BB is considering changing from its original capital structure to a new capital structure with 45% debt and 55% equity. This results in a weighted average cost of capital equal to 10.4% and a new value of operations of $576,923. Assume BB raises $259,615 in new debt and purchases T-bills to hold until it makes the stock repurchase. BB then sells the T-bills and uses the proceeds to repurchase stock. How many shares remain after the repurchase, and what is the stock price per share immediately after the repurchase?

Question

Quizplus · Accepted Answer

First, find the stock price after issuing debt but prior to repurchase:
 $\begin{array} { l r } 
\text { Value of aperations } & 576,923 \
\text { + value of T-bills } & 259,615 \
\text { Tatal value } & \$ 836,538 \
\text { - value of debt } & 259,615 \
\text { Value of equity } &576.923 \
\text { Divide by \# shares } & 20,000 \
\text { price per share } &\$ 28.85
\end{array}$ 
The price per share does not change in the repurchase, so the number of shares repurchased is equal to the amount used to repurchase shares divided by the price per share: Number shares repurchased = $259,615/$28.85 = 8,999. Number shares remaining = 20,000 σ 8,999 = 11,001. As a check, the price per share after repurchase is:
 $\begin{array} { l r } 
\text { Value of aperatuns } & 576,923 \
\text { + value of T-bills } & 0 \
\text { Tatal value } &\$ 576,923\
\text { - repurchase } &  259,615\
\text { Value of equuity } &317,308\
\text { Divide by\# shares } &11,001 \
\text { price per share } & \$ 29.84 
\end{array}$