A company currently has assets of $5 million. The firm is 100 percent equity financed. The company

Question:

A company currently has assets of $5 million. The firm is 100 percent equity financed.
The company currently has net income of $1 million, and it pays out 40 percent of its net income as dividends. Both net income and dividends are expected to grow at a constant rate of 5 percent per year. There are 200,000 shares of stock outstanding, and it is estimated that the current is 13.40 percent.
The company is considering a recapitalization where it will issue $1 million in debt and use the proceeds to repurchase stock. Investment bankers have estimated that if the company goes through with the recapitalization, its before-tax will be 11 percent, and the will rise to 14.5 percent. The company has a 40 percent federal-plus-state tax rate.
What is the current share price of the stock (before the recapitalization)?
Cost Of Capital
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