Volunteer Fabricators, Inc -Now Assume That VF Is Considering Changing from Its Original

Multiple Choice

Volunteer Fabricators, Inc. (VF) currently has zero debt. It is a zero growth company, 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.
$\begin{array}{l}\begin{array}{lll}\text { EBIT = } & \$ 80,000 \\\text { Growth }= &0\%\\\text { Orig cost of equity, } r= &10.0 \% \\\text { New cost of equity }=r,= & 11.0 \%\\\text { Tax rate }=&40 \%\end{array}\begin{array}{lll} \text { New Debt/Value = } &20 \\ \text {New Equity/Value = } &80 \\ \text { No. of shares = } &10,00 \\ \text {Price per share = } &\$ 48.00\\ \text { Interest rate = } {r}_{d}= &7.0\%\end{array}\end{array}$
-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?

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