ABC company currently has $250,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6 percent. Its earnings before interest and taxes (EBIT) are $105,000, and it is a zero-growth company. ABC's current cost of equity is 9.0 percent, and its tax rate is 40 percent. The firm has 20,000 shares of common stock outstanding selling at a price per share of $30.00. Now assume that ABC is considering changing from its original capital structure to a new capital structure with 50 percent debt and 50 percent equity. If it makes this change, its resulting market value would be $900,000. What would be its new stock price per share?
ABC company currently has $250,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6 percent. Its earnings before interest and taxes (EBIT) are $105,000, and it is a zero-growth company. ABC's current cost of equity is 9.0 percent, and its tax rate is 40 percent. The firm has 20,000 shares of common stock outstanding selling at a price per share of $30.00. Now assume that ABC is considering changing from its original capital structure to a new capital structure with 50 percent debt and 50 percent equity. If it makes this change, its resulting market value would be $900,000. What would be its new stock price per share?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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The ABC company currently has $250,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6 percent. Its earnings before interest and taxes (EBIT) are $105,000, and it is a zero-growth company. ABC's current cost of equity is 9.0 percent, and its tax rate is 40 percent. The firm has 20,000 shares of common stock outstanding selling at a price per share of $30.00.
Now assume that ABC is considering changing from its original capital structure to a new capital structure with 50 percent debt and 50 percent equity. If it makes this change, its resulting market value would be $900,000. What would be its new stock price per share?
Now assume that ABC is considering changing from its original capital structure to a new capital structure with 50 percent debt and 50 percent equity. If it makes this change, its resulting market value would be $900,000. What would be its new stock price per share?
Group of answer choices
$28.5
$38.5
$32.5
$30.0
$34.5
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