Capital structure Buggins Inc. is Önanced equally by debt and equity, each with a market value of $1 million. The cost of debt is 5%, and the cost of equity is 10%. The company now makes a further $250,000 issue of debt and uses the proceeds to repurchase equity. This causes the cost of debt to rise to 5.5% and the cost of equity to rise to 10.83%. Assume the Örm pays no taxes. 1. How much debt does the company now have? 2. How much equity does it now have? 3. What is the overall cost of capital?
Capital structure Buggins Inc. is Önanced equally by debt and equity, each with a market value of $1 million. The cost of debt is 5%, and the cost of equity is 10%. The company now makes a further $250,000 issue of debt and uses the proceeds to repurchase equity. This causes the cost of debt to rise to 5.5% and the cost of equity to rise to 10.83%. Assume the Örm pays no taxes. 1. How much debt does the company now have? 2. How much equity does it now have? 3. What is the overall cost of capital?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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5 Capital structure
Buggins Inc. is Önanced equally by debt and equity, each with a market value of $1 million. The cost of debt is 5%, and the
1. How much debt does the company now have?
2. How much equity does it now have?
3. What is the overall cost of capital?
4. What is the percentage increase in earnings per share after the refinancing?
5. What is the new price-earnings multiple? (Hint: Has anything happened to the stock price?)
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