Question 20 Best Bagels, Inc. (BB) Best Bagels, Inc. (BB) currently has zero debt.  Its earnings before interest and taxes (EBIT) are $130,000, and it is a zero growth company.  BB’s current cost of equity is 13%, and its tax rate is 25%.  The firm has 30,000 shares of common stock outstanding selling at a price per share of $25. 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 40% debt and 60% equity. This results in a weighted average cost of capital equal to 11.7% and a new value of operations of $833,333. Assume BB raises $333,333 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? Remaining shares; Stock price after repurchase   a. 20,800; $31.51   b. 19,400; $29.44   c. 21,800; $34.34   d. 23,500; $35.71   e. 18,000; $27.78

Essentials Of Investments
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Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Question 20

Best Bagels, Inc. (BB)

Best Bagels, Inc. (BB) currently has zero debt.  Its earnings before interest and taxes (EBIT) are $130,000, and it is a zero growth company.  BB’s current cost of equity is 13%, and its tax rate is 25%.  The firm has 30,000 shares of common stock outstanding selling at a price per share of $25.


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 40% debt and 60% equity. This results in a weighted average cost of capital equal to 11.7% and a new value of operations of $833,333. Assume BB raises $333,333 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?

Remaining shares; Stock price after repurchase

  a.
20,800; $31.51
  b.
19,400; $29.44
  c.
21,800; $34.34
  d.
23,500; $35.71
  e.
18,000; $27.78
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