1) Boomington's articles of incorporation authorize the firm to issue 500,000 shares of $5 par value common stock, of which 325,000 shares have been issued. Those shares were sold at an average 12% over par. In the quarter that ended last week, Boomington earned $260,000 net income; 4 percent of that income was paid as a dividend. Prior to the close of the books, Cavalier has $3,545,000 in retained earnings. The company owns no treasury stock.
(a) Calculate the book value of equity.
(b) Now the company sells 25,000 newly issued shares at a price of $4 per share. Par value of the shares is $5. What will be the book value of equity after the issue?
2) Celtics Corp. is currently an all-equity firm with a market value of equity of $100 million. The current expected return on Celtics's equity is 25%. Celtics operates in a world with no taxes. Celtics is planning on issuing $10 million in debt with an interest rate of 10% and using the cash to repurchase $10 million in shares.
(a) After Celtics repurchases the stock, what will be the expected return on the firm's stock?
(b) After Celtics repurchases the stock, what will be the firm's weighted average cost of capital?