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. What is the stock price per share immediately after issuing the debt but prior to the repurchase?

Question

Quizplus · Accepted Answer

$\begin{array} { l r } 
\text { Value of aperations } & 576,923 \
\text { + value of T-bills } & 259,615 \
\text { Tatal value } & \$ 836,538 \
\text { - value of debt } & 259,615 \
\text { Value of equity } & \$576.923  \
\text { Divide by \# shares } & 20,000 \
\text { price per share } & \$ 28.85
\end{array}$