RECAPITALIZATION Tartan industries currently has total capital equal to $4 million, has zero debt, is in the 40% federal-plus-state tax bracket, has a net income of $1 million, and distributes 40% of its earnings as dividends Net income is expected to glow at a constant rate of 3% per year, 200,000 shares of stock are outstanding, and the current WACC is 12.30%. The company is considering a recapitalization where it will issue $2 million in debt and use the proceeds to repurchase stock. Investment bankers have estimated that if the company goes through with the recapitalization, it’s before-tax cost of debt will be 10% and its cost of equity will rise to 15.5%. a. What is the stock’s current price per share (before the recapitalization)? b. b Assuming that the company maintains the same payout ratio, what will be its stock price following the recapitalization? Assume that shares are repurchased at the price- calculated in part a

BuyFind

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250
BuyFind

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250

Solutions

Chapter
Section
Chapter 14, Problem 9P
Textbook Problem

RECAPITALIZATION Tartan industries currently has total capital equal to $4 million, has zero debt, is in the 40% federal-plus-state tax bracket, has a net income of $1 million, and distributes 40% of its earnings as dividends Net income is expected to glow at a constant rate of 3% per year, 200,000 shares of stock are outstanding, and the current WACC is 12.30%.

The company is considering a recapitalization where it will issue $2 million in debt and use the proceeds to repurchase stock. Investment bankers have estimated that if the company goes through with the recapitalization, it’s before-tax cost of debt will be 10% and its cost of equity will rise to 15.5%.

  1. a. What is the stock’s current price per share (before the recapitalization)?
  2. b. b Assuming that the company maintains the same payout ratio, what will be its stock price following the recapitalization? Assume that shares are repurchased at the price- calculated in part a

Expert Solution

Want to see the full answer?

Check out a sample textbook solution.

Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

*Response times vary by subject and question complexity. Median response time is 34 minutes and may be longer for new subjects.

Chapter 14 Solutions

Fundamentals of Financial Management (MindTap Course List)
Ch. 14 - Changes in sales cause changes in profits. Would...Ch. 14 - Would each of the following increase, decrease, or...Ch. 14 - Discuss the following statement: All else equal,...Ch. 14 - If Congress increased the personal tax rate on...Ch. 14 - Which of the following would likely entourage, a...Ch. 14 - Why do public utilities generally use different...Ch. 14 - Why is EBIT generally considered independent of...Ch. 14 - Is the dept level that maximizes a firms expected...Ch. 14 - If a firm goes from zero dept to successively...Ch. 14 - When the Bell System was broken up, the old ATT...Ch. 14 - A firm is about to double its assets to serve its...Ch. 14 - BREAK-EVEN ANALYSIS A company's fixed operating...Ch. 14 - OPTIMAL CAPITAL STRUCTURE Terrell Trucking Company...Ch. 14 - RISK ANALYSIS a. Given the following information,...Ch. 14 - UNLEVERED BETA Hartman Motor has. 18 million in...Ch. 14 - FINANCIAL LEVERAGE EFFECTS Firms HL and LL are...Ch. 14 - BREAK EVEN ANALYSIS The Warren Watch Company sells...Ch. 14 - FINANCIAL LEVERAGE EFFECTS The Neal Company wants...Ch. 14 - HAMADA EQUATION Situational Software Co. (SSC) is...Ch. 14 - RECAPITALIZATION Tartan industries currently has...Ch. 14 - BREAKEVEN AND OPERATING LEVERAGE a. Given the...Ch. 14 - RECAPITALIZATION Currently, Forever Flowers Inc....Ch. 14 - BREAKEVEN AND LEVERAGE Wingler Communications...Ch. 14 - FINANCING ALTERNATIVES The Severn Company plans to...Ch. 14 - WACC AND OPTIMAL CAPITAL STRUCTURE Elliott...Ch. 14 - Exploring the Capital Structures for Four...Ch. 14 - Exploring the Capital Structures for Four...

Additional Business Textbook Solutions

Find more solutions based on key concepts
In what ways is economics a science?

Brief Principles of Macroeconomics (MindTap Course List)

How are inflation and unemployment related in the short run?

Principles of Economics (MindTap Course List)

What are the general effects of import restrictions on trade?

Foundations of Business (MindTap Course List)

What is a correcting entry?

College Accounting, Chapters 1-27

What are reversing entries, and why are they used?

Intermediate Accounting: Reporting And Analysis

CAPM, PORTFOLIO RISK. AND RETURN Consider the following information for Stocks X, Y, and Z. The returns on the ...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

What two kinds of items on a bank reconciliation require journal entries?

College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry)