Question

Home Decor has a pretax cost of debt is 6.8 percent and a tax rate of 22 percent. What is the cost of equity if the debt-equity ratio is .65?

a-16.89%

b-17.07%

c-14.70%

d-15.69%

e-16.44%

The Greenbriar is an all-equity firm with a total market value of $596,000 and 23,200 shares of stock outstanding. Management is considering issuing $213,000 of debt at an interest rate of 9 percent and using the proceeds on a stock repurchase. Ignore taxes. How many shares will the firm repurchase if it issues the debt securities?

a-53,640 shares

b-9,213 shares

c-10,050 shares

d-8,291 shares

e- 746 shares

Answer 1

For this question we need to have WACC in the question. Otherwise we cannot calculate Cost of equity.

I am assuming WACC = 11%

Cost of debt (Kd) = 6.8%

Tax = 22%

Debt / Equity = 65/100

Debt/ Capital (Wd) = 65 / 165

Equity / Capital (We) = 100 / 165

Cost of equity (Ke) = ?

WACC = Kd * (1-tax) * Wd + Ke *We

11% = 6.8% * 0.78 * 65 / 100 + Ke * 100 / 165

So

Ke = 14.70%

But please note that we need to have WACC to find cost of equity

Answer is D

Market value = 596,000

number of shares = 23200

Price per share = 596000 / 23200 = 25.689

Debt to be issued = 213000

Price = 25.689

Number of shares to be repurchased = 213000 / 25.689

Number of shares to be repurchased = 8291

LET ME KNOW IF YOU HAVE ANY DOUBTS