Expected change in value per share due to recapitalization

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Reference no: EM131536338

XYZ Company is currently 100% equity and zero growth. The firm has an annual EBIT of $1,200,000, its current cost of equity is 7%, and the corporate tax rate is 40% (assume personal taxes are zero). XYZ currently has 200,000 shares outstanding.

The firm's CFO has decided to recapitalize by issuing $5,000,000 in debt that carries an interest rate of 5% and repurchasing shares. Assuming that the assumptions of the Modigilani and Miller models hold, what is the expected change in the value per share due to the recapitalization?

a. $5.79

b. $51.43

c. $19.46

d. $70.89

Reference no: EM131536338

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