What would be the new stock price after recapitalization

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Reference no: EM131329407

The Rivoli Company has no debt outstanding, and its financial position is given by the following data:

Assets (Market Value=Book Value) = $3,000,000

EBIT = $500,000

Cost of Equity = 10%

Stock Price = $15

Shares Outstanding = 200,000

Tax Rate (Federal + State) = 40%

The firm is considering sellings bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equity will increase to 11% to reflect the increased risk. Bonds can be sold at a cost of 7%. Rivoli is a no-growth firm. Hence, all its earnings are paid out as divdends. Earnings are expected to be constant over time.

Question: What would be the new stock price after recapitalization?

Reference no: EM131329407

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