Assume That PP Is Considering Changing from Its Original Capital

question 56

Multiple Choice

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.PP then sells the T-bills and uses the proceeds to repurchase stock.How many shares remain after the repurchase, and what is the stock price per share immediately after the repurchase?

• A)7,500; $71.49
• B)7,000; $59.57
• C)6,500; $51.06
• D)6,649; $53.33
• E)6,959; $58.78

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Definitions:

Predetermined Overhead Rate

A rate used to allocate estimated overhead costs to products or job orders, based on a planned level of activity or driver.

Unused Capacity

Resources available for use that are not being employed in production, often representing inefficiency.

Estimated Activity

An approximation of the level of effort, production volume, or usage that forms the basis for budgeting and costing activities.

Activity at Capacity

Refers to the maximum level of work that an organization can achieve with its current resources and constraints.