New value of the stock per share

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Assume that the Knot Tubee Deniad Corporation (KTD) is forecasting annual operating income of $40 million, which is not expected to grow since KTD plans to pay all profits out in dividends this year. It's tax rate is 40% and it presently is financed by all equity (10 million shares) with stockholders requiring a 20% return on their stock. If KTD raises its debt ratio to 30% by borrowing at an interest rate of 10% and uses the funds to repurchase stock, what will be the new value of the stock per share? (Assume that stockholders will increase their required return to 25%)

Reference no: EM132819951

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