Assume that the recapitalization has no effect on the company's price earnings(P/E) ratio.
Question 5
The following information applies to RTC logistics ltd:
Operating income(EBIT)...............=RM300,000
Shares outstanding ........................=120,000
Debt.................................................=RM100,000
EPS..................................................=RM1.45
Interest expense...............................=RM10,000
Stock price.........................................=RM17.40
Tax rate...............................................=40%
The company is considering recapitalization where it would issue RM348,000 worth of new debt and use the peoceeds to buy back RM348,000 worth of common stock. The buyback will be undertaken at the pre-recapitalization share price of RM17.40 per share.The recapitalization is not expected to have an effect on operating income or the tax rate. After the recapitalization,the company's total interest expenses will be RM50,000
Requirement:
Assume that the recapitalization has no effect on the company's price earnings(P/E) ratio.
What is the expected price of the company's stock following the recapitalization ? should RTC proceed with the recapitalization exercise?Explain.
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