Chapter $16-$ Does Debt Policy Matter?

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"Increasing financial leverage increases both the cost of debt $(r_{\text{d}\text{e}\text{b}\text{t}})$ and the cost of equity $(r_{\text{e}\text{q}\text{u}\text{i}\text{t}\text{y}}).$ So the overall cost of capital cannot stay constant." This problem is designed to show that the speaker is confused. Buggins Incorporated. is financed equally by debt and equity, each with a market value of $$1\mathrm{.}6$ million. The cost of debt is $5\mathrm{.}6\%,$ and the cost of equity is $10\mathrm{.}6\%.$ The company now makes a further $$400,000$ issue of debt and uses the proceeds to repurchase equity. This causes the cost of debt to rise to $6\mathrm{.}1\%$ and the cost of equity to rise to $14\mathrm{.}43\%.$ Assume the firm pays no taxes.

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a$.$ How much debt does the company now have?

b$.$ How much equity does it now have?

c$.$ What is the overall cost of capital?

Note: Do not round intermediate calculations. Enter your answer as a percent rounded to $1$ decimal place.

d$.$ What is the percentage increase in earnings per share after the refinancing?

Note: Do not round intermediate calculations. Enter your answer as a percent rounded to $2$ decimal places.

e$.$ What is the new price$-$earnings multiple? $($Hint: Has anything happened to the stock price?$)$

Note: Round your answers to $2$ decimal place.

$\backslash$table$[[$a$.$ Company's current debt,,$],[$b$.$ Company's current equity,,$],[$c$.$ Overall cost of capital,,$\%$