Question

Pennewell Publishing Inc. (PP)
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 the data for Pennewell Publishing Inc. (PP). 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. PP 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?

a. 7,500; $71.49

b. 7,000; $59.57

c. 6,959; $58.78

d. 6,649; $53.33

e. 6,500; $51.06

Answer 1

1. Share Price after repurchase = Value of operations + Investment in TBills - new debt) / Shares O/s

Share Price after repurchase = (510638 + 178723 - 178723) / 10000

Share Price after repurchase = $51.06 Option D

2. Shares remaining after repurchase = Current shares O/s - (amount raised / Share Price)

Shares remaining after repurchase = 10000 - (178723 / 51.06)

Shares remaining after repurchase = 6500

Option E 6500; $51.06

*Please comment if you face any difficulty and please don't forget to provide positive rating*