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You observe a company, BuzzBee Inc., trading on the exchange with the following characteristics. Assume markets are efficient. The assumptions of M&M hold. There are no personal taxes. All returns are annual.

Perpetual EBIT: $ 1million
Debt: $ 4 million
Unlevered return on equity: 10.5%
Interest on debt: 7%
No. Of shares outstanding: 500,000
Corporate Tax: 20%

a) What is the price per share of BuzzBee Inc?

b) Suppose BuzzBee is considering a new project where there is an expected EBIT of $1 million in perpetuity and it costs $4 million in initial investment. The new project is in the candy business where the comparison company, HoneyBunch Candy has the following information.

Debt-equity ratio: 1:4
Return on equity: 15%
Corporate tax: 20%
Interest on debt 6%

What is the NPV of the new project if it is all equity financed?

c) What happens to the price of BuzzBee’s stock if it adopted the new project in part b with $2 million in debt and $2 million in equity? (If you could not solve (a), assume the price per share before the project is $10.)

d) Suppose in BuzzBee’s place to adopt the new project, the company decides to issue the $2 million in equity through rights offering. The value of the right is $2. Using the price you solved for in part c as the rights-on price, what is the subscription price? (If you could not solve part c, assume the price per share after the project is adopted is $15.)

2) A convertible bond is selling for $1,222.70. It has 10 years to maturity, a $$1,000 face value, and a 10% coupon paid quarterly. Similar nonconvertible bonds are priced to yield 8%. The conversion ratio is 40. The stock currently sells for $30.125 per share. Determine the convertible bond’s option value.

3) Freedom 55 (“F55”) is a consulting agency currently trades on the TSX. F55 has 10,000,000 million shares outstanding; the market price per share is currently $20. The company also has perpetual debt worth $100 million. The interest rate on the debt is 9% and it is trading at par. F55 has an anticipated annual EBIT of $80,000,000. F55 operates in a country where there are no personal taxes; however the corporate tax rate is 40%. Ms. Chica Tope, the President of the company, wants to relever the company by issuing $50 million of new equity in order to repurchase an equal amount of the company’s debt.
a. What will be F55’s market value after the relevering?
b. What is F55’s WACC before the relevering?
c. What is F55’s WACC after the relevering?
d. How many shares will F55 issue and at what price per share?