Recapitalization-earnings and equal dividends per shares

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Reference no: EM13947129

Michaely Inc. is an all-equity firm with 100,000 shares outstanding. It has $500,000 of EBIT, which is expected to remain constant in the future. The company pays out all of its earnings, so earnings per share (EPS) equal dividends per shares (DPS). Michaely's current stock price is $30.00 and its marginal tax rate is 40%.

The company is considering issuing $600,000 of debt at an annual before-tax cost of 10 percent and using the proceeds from the debt issue to repurchase stock. The risk-free rate is 5.5%, the market risk premium is 5.0%, and the firm's beta is currently 0.90, but the CFO believes beta would rise to 1.20 if the recapitalization occurs.

What would the stock price be following (or after) the recapitalization?

a. $33.00

b. $30.00

c. $28.70

d. $26.40

e. $22.96

Reference no: EM13947129

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