Equity capital of a corporation R. is represented by 100 shares. Current stock price is $44 per share. R. partly finances its operations by perpetual riskless debt with a coupon rate of 6% which is traded at 120% of par. The market value of debt is 2000. Corporate tax rate is 57%. Shareholders income consists by dividend payments and capital gains. Dividends account for 1/3 of shareholders’ income and capital gains are 2/3. Personal dividend tax is 50% and capital gains tax is 20%. You also know that personal interest income tax is 25%. After the last shareholders meeting, a new CEO was appointed – she hates to use debt in the capital structure and going to issue additional equity to retire half of its leverage. 4.1. How many shares will be issued to undertake described recapitalization plan? 4.2. Determine the value of equity after debt is retired; 4.3. Explain what will happen to equity required return after capital structure change.
Mf3.
Equity capital of a corporation R. is represented by 100 shares. Current stock price is $44 per share. R. partly finances its operations by perpetual riskless debt with a coupon rate of 6% which is traded at 120% of par. The market value of debt is 2000. Corporate tax rate is 57%. Shareholders income consists by dividend payments and
4.1. How many shares will be issued to undertake described recapitalization plan? 4.2. Determine the value of equity after debt is retired;
4.3. Explain what will happen to equity required return after capital structure change.
Step by step
Solved in 2 steps
