Exhibit 15.1 Pennewell Publishing Inc. (PP) is a zero growth company. It current

Question

Exhibit 15.1
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 15.1. 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. What is the stock price per share immediately after issuing the debt but prior to the repurchase?

Exhibit 15.1
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.

Explanation / Answer

Value of operations

510638

(+) Value of T-bills

178723

Total value of firm

689361

(-) Value of debt

-178723

Value of equity

510638

Price per share = Value of equity / no. of shares

                                = 510,638 /10,000

                                = 51.06

Option D is correct.

Value of operations

510638

(+) Value of T-bills

178723

Total value of firm

689361

(-) Value of debt

-178723

Value of equity

510638

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