Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Tartan Industries currently has total capital equal to $5 million, has zero debt, is in the 40% federal-plus-state tax bracket, has a net income of

Tartan Industries currently has total capital equal to $5 million, has zero debt, is in the 40% federal-plus-state tax bracket, has a net income of $3 million, and distributes 40% of its earnings as dividends. Net income is expected to grow at a constant rate of 3% per year, 160,000 shares of stock are outstanding, and the current WACC is 12.60%.

The company is considering a recapitalization where it will issue $4 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 cost of debt will be 11% and its cost of equity will rise to 14.5%.

1. What is the stock's current price per share (before the recapitalization)?

P(0) = $80.47

2 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.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Markets and Institutions

Authors: Jeff Madura

12th edition

9781337515535, 1337099740, 1337515531, 978-1337099745

More Books

Students also viewed these Finance questions

Question

Where is the position?

Answered: 1 week ago