Brown Fabricators, Inc. (BF) currently has zero debt. It is a zero growth company, and it has the da

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Brown Fabricators, Inc. (BF) 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 riskresulting from the additional leverage would cause the required rate of return on equity to rise somewhat, as indicated below.

EBIT = $100,000 New Debt/Value = 30%
Growth = 0% New Equity/Value = 70%
Orig cost of equity, rs = 10.0% No. of shares = 20,000
New cost of equity = rs = 11.0% Price per share = $24.00
Tax rate = 40% Interest rate = rd = 7.0%

Debt/Value = 40% Value of new debt = $247,000
Equity/Value= 60% New WACC = 9.3%

Based on the data in the previous two problems, what would the stock price be if VF issued the new debt and immediately used the proceeds to repurchasestock?

$32.26
$40.70
$52.00
$53.33
$56.00

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