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Tartan Industries currently has total capital equal to $7 million, has zero debt, is in the...

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Finance

Tartan Industries currently has total capital equal to $7million, 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 3% per year, 400,000 shares of stock are outstanding, andthe current WACC is 13.80%.

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 9%and its cost of equity will rise to 15.5%.

  1. What is the stock's current price per share (before therecapitalization)? Round your answer to the nearest cent. Do notround intermediate steps.
    $
  2. 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 intermediatesteps.
    $

Answer & Explanation Solved by verified expert
4.3 Ratings (670 Votes)
Total Capital 7000000Net Income 2000000Tax rate 40Dividend Payout ratio 40No of outstanding share before recapitalization    See Answer
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