Tartan Industries currently has total capital equal to $4 million, has zero debt, is in the...

80.2K

Verified Solution

Question

Accounting

Tartan Industries currently has total capital equal to $4million, has zero debt, is in the 40% federal-plus-state taxbracket, has a net income of $2 million, and distributes 40% of itsearnings as dividends. Net income is expected to grow at a constantrate of 6% per year, 190,000 shares of stock are outstanding, andthe current WACC is 12.80%.
The company is considering a recapitalization where it willissue $1 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 11%and its cost of equity will rise to 14.5%.
A.) What is the stock's current price per share(before the recapitalization)? Do not round intermediatecalculations. Round your answer to the nearest cent. $
B.) Assuming that the company maintains thesame payout ratio, what will be its stock price following therecapitalization? Assume that shares are repurchased at the pricecalculated in part a. Do not round intermediate calculations. Roundyour answer to the nearest cent.

Answer & Explanation Solved by verified expert

3.7 Ratings (272 Votes)

Before capitalization Particulars amount net income 2000000 no of share 190000 Earning per share net incomeno of share Earning per share 2000000190000 See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member