Exhibit 16.1 Pennewell Publishing Inc. (PP) Is a Zero Growth Company. It

Exhibit 16.1
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 Exhibit 16.1.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) 6,500; $51.06
D) 6,649; $53.33
E) 6,959; $58.78

Correct Answer:

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