Exhibit 16 -Refer to Exhibit 16

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.What would the stock price be if VF issued the new debt and immediately used the proceeds to repurchase stock?

A) $49.43
B) $50.70
C) $52.00
D) $53.33
E) $56.00

Correct Answer:

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