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An all-equity firm with 200,000 shares outstanding, Antwerther Inc., has $2,000,000 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). Its tax rate is 40%.The company is considering issuing $5,000,000 of 10.0% bonds and using the proceeds to repurchase stock. The risk-free rate is 6.5%, the market risk premium is 5.0%, and the beta is currently 0.90, but the CFO believes beta would rise to 1.10 if the recapitalization occurs.Assuming that the shares can be repurchased at the price that existed prior to the recapitalization, what would the price be following the recapitalization?

Respuesta :

jepessoa

Answer:

$69.23

Explanation:

current stock price (pre-recapitalization)

Div = EPS

EPS = ($2,000,000 x 0.6) / 200,000 = $6

g = 0

Re = 6.5% + (0.9 x 5%) = 6.5% + 4.5% = 11%

P₀ = $6 / 11% = $54.55

the stock repurchase = $5,000,000 / $54.545454 = 91,666 stocks

total outstanding stocks after the repurchase = 200,000 - 91,666 = 108,334

new net income = ($2,000,000 - $500,000) x 0.6 = $900,000

new EPS = $900,000 / $8.30764

new Re = 6.5% + (1.1 x 5%) = 12%

P₁ = $8.30764 / 12% = $69.230333 = $69.23

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