Subject: Financial strategy & policy

Question No 4

Answer the following.

ii) You have assets of Rs.7 million with no debt, and the tax is 40%. Your net income is Rs.2 million, and you pay out 40% of earnings as dividends. Net income will grow at a constant rate of 5% per year, the outstanding shares are 200,000, and the current WACC is 15.40%. You are considering a change in capital structure with the issuance of Rs.1 million in debt which will be used to repurchase shares. After this change, your before-tax cost of debt will be 11% and the cost of equity will be 16.5%. What is the stocks current price per share before change? (02)