Tapley Inc. currently has total capital equal to $5 million, has zero debt, is i

Question

Tapley Inc. currently has total capital equal to $5 million, has 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 3% per year, 140,000 shares of stock are outstanding, and the current WACC is 12.10%.

The company is considering a recapitalization where it will issue $3 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 10% and its cost of equity will rise to 14.5%.

Explanation / Answer

1).

dividend paid = .4*1 = $.4 million

current prrice

curent price = .4*(1.03)/(.121-.03)

current price = 4.527472 million

current sharre priice = 4.52747252*1000000/140000 = $32.339

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