Exhibit 16.3 Best Bagels, Inc. (BB) Currently Has Zero Debt. Its Earnings

Exhibit 16.3
Best Bagels, Inc. (BB) currently has zero debt. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero growth company. BB's current cost of equity is 13%, and its tax rate is 40%. The firm has 20,000 shares of common stock outstanding selling at a price per share of $23.08.
-Refer to Exhibit 16.3.Now assume that BB is considering changing from its original capital structure to a new capital structure with 45% debt and 55% equity.This results in a weighted average cost of capital equal to 10.4% and a new value of operations of $576,923.Assume BB raises $259,615 in new debt and purchases T-bills to hold until it makes the stock repurchase.BB 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) 11,001; $28.85
B) 12,711; $35.62
C) 13,901; $42.57
D) 15,220; $54.31
E) 17,105; $89.67

Correct Answer:

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