Tartan Industries currently ha
Tartan Industries currently has total capital equal to $10million, has zero debt, is in the 40% federal-plus-state taxbracket, has a net income of $4 million, and distributes 40% of itsearnings as dividends. Net income is expected to grow at a constantrate of 3% per year, 340,000 shares of stock are outstanding, andthe current WACC is 13.30%.
The company is considering a recapitalization where it willissue $3 million in debt and use the proceeds to repurchase stock.Investment bankers have estimated that if the company goes throughwith the recapitalization, its before-tax cost of debt will be 10%and its cost of equity will rise to 14.5%.
-What is the stock’s current price per share (before therecapitalization)? Round your answer to the nearest cent. Do notround intermediate steps. THE ANSWER I GOT FOR THIS PROBLEMIS $47.06
-Assuming that the company maintains the same payout ratio, whatwill be its stock price following the recapitalization? Assume thatshares are repurchased at the price calculated in part a. Roundyour answer to the nearest cent. Do not round intermediate steps.I NEED HELP WITH THIS PROBLEM, PLEASE
Answer:
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Note : Cost of Debt = Interest x (1-tax)
= 10% x (1-0.4)
= 10% x 0.6
= 6%
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