Pennewell Publishing Inc. (PP) is a zero growth company. It currently has zero debt and its earnings before interest

Question

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 25%. 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 9.125% and a new value of operations of $657,534. Assume PP raises $230,137 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?

Help In Homework · Accepted Answer

Computation of the number of shares remain after repurchased:- Total value = Value of operations + Value of marketable securities = $657,534 + $230,137 = $887,671 Value of equity = Value of operations- Value of debt = $887,671 - $230,137 = $657,534 Price per share = Value of equity Number of shares = $657,534 / 10,000 = $65.75 Shares repurchased = Value of marketable securities / Price per share = $230,137 / $65.75 = 3,500 shares Shares remain after repurchase = Number of shares - Shares repurchase = 10,000 - 3,500 = 6,500 shares Computation of the price per share after repurchase:- Price per share = Value of equity / Number of shares remain after repurchase = ($657,134 - $230,137) 6,500 = $427,397 / 6,500 = $65.75 per share

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