Volunteer Fabricators, Inc -Based on the Data in the Previous Two Problems, What

question 36

Multiple Choice

Volunteer Fabricators, Inc. (VF) 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 risk resulting from the additional leverage would cause the required rate of return on equity to rise somewhat, as indicated below.
$\begin{array}{l}\begin{array}{lll}\text { EBIT = } & \$ 80,000 \\\text { Growth }= &0\%\\\text { Orig cost of equity, } r= &10.0 \% \\\text { New cost of equity }=r,= & 11.0 \%\\\text { Tax rate }=&40 \%\end{array}\begin{array}{lll} \text { New Debt/Value = } &20 \\ \text {New Equity/Value = } &80 \\ \text { No. of shares = } &10,00 \\ \text {Price per share = } &\$ 48.00\\ \text { Interest rate = } {r}_{d}= &7.0\%\end{array}\end{array}$
-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 repurchase stock?

• A) $49.43
• B) $50.70
• C) $52.00
• D) $53.33
• E) $56.00

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Definitions:

Fundamental Attribution Error

A cognitive bias that involves overestimating the effect of personality or disposition and underestimating the effect of situational factors when interpreting the behaviors of others.

Defensive Attribution

A psychological process by which individuals tend to attribute more blame to victims and less to perpetrators when they see themselves as similar to the victim.

Behavioral Tendency

An inclination or predisposition of an individual to exhibit certain patterns of behavior.

Intuition

The ability to understand or know something immediately, without conscious reasoning.