Business, 21.02.2020 18:56 3steves

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. 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. What is the stock price per share after issuing the debt and how many shares can Pennewell buy back using the proceeds from the issuance of debt? (Hint: currently the company has no debt, so the value of operation will be equal to the value of equity which is $480,000. You don't need to calculate FCF here, but if you do, FCF will be $48,000 per year. This also explains that after recapitalization, the value of operation will be $510,638)

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

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