Recapitalization Tapley Inc, currently has capital equal to $6 million, has zero
ID: 2778414 • Letter: R
Question
Recapitalization Tapley Inc, currently has capital equal to $6 million, has zero debt, is in the 40% federal-plus-state tax bracket, has a net income of $4 million, and pays out 40% of its earning as dividends Net income is expected to grow at a constant rate of 4% per year, 340,000 shares of stock are outstanding, and the current WACC is 13.60%. What is the stock's current price per shard Assuming that the company maintains the same payout ratio, Round your answer to the nearest cent. Do not round intermediate steps.Explanation / Answer
Stock price before recapitalization
Dividend per share= net income x Dividend payout ratio / shares outstanding
= 4,000,000 x 40% / 340,000
Do= 4.706
G= 4%
Ke = 13.80%
Price = Do x (1+g)/(ke-g)
= 4.706 x (1+0.04)/(0.1380-0.04)
= 4.89424/0.098
= 49.94
Stock price After recapitalization
No of stocks replaced = 2,000,000/ 49.94
=40,048
No. of stocks outstanding = 340,000 – 40,048
= 299,952
Total interest on debt = amount of debt x interest rate
=2,000,000 x11%
= 220,000
After tax interest cost = 220,000x(1-0.40)
=132,000
Net income after recapitalization = net income before capitalization – after tax interest
= 4,000,000-132,000
= 3.868,000
Dividend per share= net income x Dividend payout ratio / shares outstanding
= 3,868,000x 40% / 299,952
= 5.1581
G=4%
Ke=16.50%
Price = Do x (1+g)/(ke-g)
= 5.1581x (1+0.04)/(0.1650 -0.04)
= 5.364424/0.125
= 42.92
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