Maintains the same payout ratio

Reference no: EM131035684

RECAPITALIZATION Tapley Inc. 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 $1 million, and distributes 40% of its earnings as dividends. Net income is expected to grow at a constant rate of 5% per year, 200,000 shares of stock are outstanding, and the current WACC is 13 40%. 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 cost of debt will be 11% and its cost of equity will rise to 14 5%.

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

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.

Reference no: EM131035684

Questions Cloud

Write a paper about major factors that contribute to project : Write a two pages paper about the major factors that contribute to project's success? describe and justify your position.

Breakeven and operating leverage : a. Given the following graphs, calculate the total fixed costs, variable costs per unit, and sales price for Firm A. Firm B's fixed costs are $120,000, its variable costs per unit are $4, and its sales price is $8 per unit.

Effect on cash received and interest expense recognized : Prepare a statement of cash flows for the year ended December 31, 2015 using the indirect method. (Hint: for any accounts where the balance changed.

Describe the original data warehouse designed : Q1: Describe the original data warehouse designed for Indiana University Health and its limitations. Please describe the new data warehouse and the differences between each?

Maintains the same payout ratio : RECAPITALIZATION Tapley Inc. 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 $1 million, and distributes 40% of its earnings as dividends. Net income is expected to ..

Strategies firms can use when entering foreign markets : Prepare a document based on credible research and course materials addressing the following: Discuss the four strategies firms can use when entering foreign markets. Using specific examples, describe the strategies used by the following companies in ..

Identify the right fiscal policy : Identify the right fiscal policy that should be followed: contractionary or expansionary - explain why this fiscal policy should be used.

Hamada equation cyclone software : HAMADA EQUATION Cyclone Software Co. is trying to establish its optimal capital structure. Its current capital structure consists of 25% debt and 75% equity; however, the CEO believes that the firm should use more debt. The risk-free rate, rRF, is..

About the discuss contracts : Discuss contracts. Include in your answer:

User Account

All Pages