Exhibit 16.2 VanMannen Foundations, Inc. (VF) is a zero-growth company that currently has zero debt, and it has the data shown below. Now the company is considering using some debt, moving to the market value capital structure indicated below. The money raised would be used to repurchase stock. It is estimated that the increase in risk resulting from the additional leverage would cause the required rate of return on equity to rise somewhat, as indicated below. \[\begin{array} { l c } \text { EBIT } = & \$ 80,000 \mathrm { New } \text { Debt } / \text { Value } =&20\% \\ \text { Growth } = & 0 \% \text { New Equity/Value } =&80\% \\ \text { Orig cost of equity, } r _ { s } = & 10.0 \% \text { No. of shares } =&10,000 \\ \text { New cost of equity } = r _ { s } = & 11.0 \% \text { Price per share } =&\$48.00 \\ \text { Tax rate } = & 40 \% \text { Interest rate } = r _ { d } =&7.0\% \end{array}\] -Refer to Exhibit 16.2.Now assume that VF is considering changing from its original zero debt capital structure to a new capital structure with even more debt.This results in changes in the cost of debt and equity,and thus to a new WACC and a new value of operations.Assume VF raises the amount of new debt indicated below and uses the funds to purchase and hold T-bills until it makes the stock repurchase.What is the stock price per share immediately after issuing the debt but prior to the repurchase? \[\begin{array} { l l r } \text { Debt/Value } = & 40 \% \text { Value of new debt } = & \$ 213,333 \\ \text { Equity } / \text { Value } = & 60 \% \mathrm { New } \mathrm { WACC } = & 9.0 \% \end{array}\]

A) $50.67 B) $53.33 C) $56.00 D) $58.80 E) $61.74 A) $50.67 B) $53.33 C) $56.00 D) $58.80 E) $61.74

LeCompte Learning Solutions is considering making a change to its capital structure in hopes of increasing its value.The company's capital structure consists of debt and common stock.In order to estimate the cost of debt,the company has produced the following table: \[\begin{array} { c c c c c } \begin{array} { c } \text { Percent financed } \\ \text { with debt } \left( \mathrm { wd } _ { \mathrm { d } } \right) \end{array} & \begin{array} { c } \text { Percent financed } \\ \text { with equity } \left( \mathrm { w } _ { \mathrm { c } } \right) \end{array} & \begin{array} { c } \text { Debt-to-equity } \\ \text { ratio } ( \mathrm { D } / \mathrm { S } ) \end{array} & \begin{array} { c } \text { B ond } \\ \text { Rating } \end{array} & \begin{array} { c } \text { Before-tax } \\ \text { cost of debt } \end{array} \\ \hline 0.10 & 0.90 & 0.10 / 0.90 = 0.11 & \mathrm { AAA } & 7.0 \% \\ 0.20 & 0.80 & 0.20 / 0.80 = 0.25 & \mathrm { AA } & 7.2 \\ 0.30 & 0.70 & 0.30 / 0.70 = 0.43 & \mathrm {~A} & 8.0 \\ 0.40 & 0.60 & 0.40 / 0.60 = 0.67 & \mathrm { BBB } & 8.8 \\ 0.50 & 0.50 & 0.50 / 0.50 = 1.00 & \mathrm { BB } & 9.6 \end{array}\] The company uses the CAPM to estimate its cost of common equity,rs.The risk-free rate is 5% and the market risk premium is 6%.LeCompte estimates that if it had no debt its beta would be 1.0.(Its "unlevered beta," bU,equals 1.0.)The company's tax rate,T,is 40%. On the basis of this information,what is LeCompte's optimal capital structure,and what is the firm's cost of capital at this optimal capital structure?

A) wc = 0.9; wd = 0.1; WACC = 14.96% B) wc = 0.8; wd = 0.2; WACC = 10.96% C) wc = 0.7; wd = 0.3; WACC = 7.83% D) wc = 0.6; wd = 0.4; WACC = 10.15% E) wc = 0.5; wd = 0.5; WACC = 10.18% A) wc = 0.9; wd = 0.1; WACC = 14.96% B) wc = 0.8; wd = 0.2; WACC = 10.96% C) wc = 0.7; wd = 0.3; WACC = 7.83% D) wc = 0.6; wd = 0.4; WACC = 10.15% E) wc = 0.5; wd = 0.5; WACC = 10.18%