latinmatilda
Sep 1, 2008, 10:20 AM
Hi there. I was wondering if anyone could explain to me how to figure this out. I am not looking for the answer, just a clue on how to figure it out.
Thanks!
Tapley Inc. currently has assets of $5 million, zero debt, is in the 40% federal-plus-state tax bracket, has a net income of $1 million, and pays out 40% of its earnings as dividends. Net income is expected to grow at a constant rate of 5 percent 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%.
What is the stock's current price per share (before the recapitalization)?
Assuming the company maintains the same payout ratio, what will be its stock price following the recapitalization?
Thanks!
Tapley Inc. currently has assets of $5 million, zero debt, is in the 40% federal-plus-state tax bracket, has a net income of $1 million, and pays out 40% of its earnings as dividends. Net income is expected to grow at a constant rate of 5 percent 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%.
What is the stock's current price per share (before the recapitalization)?
Assuming the company maintains the same payout ratio, what will be its stock price following the recapitalization?