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 $3 million, and pays out 40% of its earnings as dividends. Net income is expected to grow at a constant rate of 6% per year, 480,000 shares of stock are outstanding, and the current WACC is 13.10%. The company is considering a recapitalization where it will issue $5 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 9% and its cost of equity will rise to 16.5%. >>>>>>>>>What is the stock's current price per share (before the recapitalization)? (Round your answer to the nearest cent.)

Explanation / Answer

rate me first $25 Since the company has zero debt, then the WACC = Cost of Equity = 13.4% Dividends Paid = $1,000,000 × 40% = $400,000 Dividends per Share = $400,000 / 200,000 = $2 Next Year Dividend (Growth rate = 5%) = $2 × 1.05 = $2.10 Price per share = = $25

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