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What will be the increase in total dividends

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Question - Tempquin Motors240 million. It's annual before tax operating income (EBIT) is $34.25 is an all-equity firm with a total market value of $240 34.25 million and expected to be stable for the distant future. The firm has 10 million shares outstanding. Tempquin has no future growth opportunities so pays out all its earnings as dividends.

The firm is contemplating a recapitalization plan which involves borrowing $80 million in debt at the rate of 4.0% and using the proceeds to buy back some of its shares. This plan will not alter the size or capability of the operations, so operating income is expected to remain unchanged. The plan will also not affect its dividend payout policy.

Assume a marginal tax rate of 28.0% and no other capital market imperfections.

Required -

(a) What is the dividend per share before the recapitalization?

(b) What would be the dividend per share if the recapitalization goes ahead?

(c) A shareholder owns 500 Tempquin shares and does not sell them during the buyback. What will be the increase in total dividends the shareholder can expect to receive from the change in the firm's capital structure?

Reference no: EM132982194

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