Barnes Baskets, Inc

question 64

Multiple Choice

Barnes Baskets, Inc. (BB) currently has zero debt. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero growth company. BB's current cost of equity is 13%, and its tax rate is 40%. The firm has 20,000 shares of common stock outstanding selling at a price per share of $23.08.
-BB is considering moving to a capital structure that is comprised of 20% debt and 80% equity, based on market values. The debt would have an interest rate of 7%. The new funds 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 to 14%. If this plan were carried out, what would BB's new value of operations be?

• A) $498,339
• B) $512,188
• C) $525,237
• D) $540,239
• E) $590,718

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Definitions:

UCC

The Uniform Commercial Code, a comprehensive set of laws governing all commercial transactions in the United States, intended to harmonize the laws of sales and other commercial transactions across state lines.

Recover Damages

The action of obtaining compensation through legal means for loss or injury.

Design Defect

A flaw in the planned design of a product, making it inherently unsafe for its intended or reasonably foreseeable use.

Manufacturing Defect

A flaw in a product that originates from the manufacturing process, making it dangerous or unusable.