Best Bagels, Inc. (BB)
Best Bagels, Inc. (BB) currently has zero debt. Its earnings before
interest and taxes (EBIT) are $130,000, and it is a zero growth
company. BB’s current cost of equity is 13%, and its tax rate is
25%. The firm has 30,000 shares of common stock outstanding selling
at a price per share of $25.
Refer to the data for Best Bagels, Inc. (BB). Now assume that BB is
considering changing from its original capital structure to a new
capital structure with 40% debt and 60% equity. This results in a
weighted average cost of capital equal to 11.7% and a new value of
operations of $833,333. Assume BB raises $333,333 in new debt and
purchases Tbills 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?









Best Bagels, Inc. (BB) Best Bagels, Inc. (BB) currently has zero debt. Its earnings before interest...
Bagels Inc. has a target capital structure of 40% debt, 5% preferred stock and 55% common equity. DBI’s beforetax cost of debt is 8% and marginal tax rate is 25%. Preferred stockholders require a 3.25% return. Currently the firm’s beta is 0.25. Using a market return of 11.0% and riskfree rate of 2.0%, what is Daigle’s Bagels’ a) cost of equity? (3 points) b) WACC? (7 points)
Bagels Inc. has a target capital structure of 40% debt, 5% preferred stock and 55% common equity. DBI’s beforetax cost of debt is 8% and marginal tax rate is 25%. Preferred stockholders require a 3.25% return. Currently the firm’s beta is 0.25. Using a market return of 11.0% and riskfree rate of 2.0%, what is Daigle’s Bagels’ a) cost of equity? (3 points) b) WACC? (7 points)
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