Tartan Industries currently has total capital equal to $9 million, has zero debt, is in the 25% federal-plus-state tax bracket, has a net income of $2 million, and distributes 40% of its earnings as dividends. Net income is expected to grow at a constant rate of 6% per year, 410,000 shares of stock are outstanding, and the current WACC is 13.70%. The company considering a recapitalization where it will issue $4 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 15.5%. a. What is the stock's current price per share (before the recapitalization)? Do not round intermediate calculations. Round your answer to the nearest cent. $ b. Assuming that the company maintains the same payout ratio, what will be its stock price following the recapitalization? Assume that shares are repurchased calculations. Round your answer to the nearest cent. $ the price calculated in part a. Do not round intermediate

Tartan Industries currently has total capital equal to $9 million, has zero debt, is in the 25% federal-plus-state tax bracket, has a net income of $2 million, and distributes 40% of its earnings as dividends. Net income is expected to grow at a constant rate of 6% per year, 410,000 shares of stock are outstanding, and the current WACC is 13.70%. The company considering a recapitalization where it will issue $4 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 15.5%. a. What is the stock's current price per share (before the recapitalization)? Do not round intermediate calculations. Round your answer to the nearest cent. $ b. Assuming that the company maintains the same payout ratio, what will be its stock price following the recapitalization? Assume that shares are repurchased calculations. Round your answer to the nearest cent. $ the price calculated in part a. Do not round intermediate

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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Kielly Machines Inc. is planning an expansion program estimated to cost $100 million. Kielly is going to raise funds according to its target capital structure shown below. Debt 0.30 Preferred stock 0.24 Equity 0.46 Kielly had net income available to common shareholders of $184 million last year of which 75% was paid out in dividends. The company has a marginal tax rate of 40%. Additional data: The before-tax cost of debt is estimated to be 11%. The market yield of preferred stock is estimated to be 12%. The after-tax cost of common stock is estimated to be 16% What is Kielly's weighted average cost of capital? Select one: a. 14.00% b. 12.22% c. 13.54% d. 13.00%
Landman Corporation (LC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .78. It’s considering building a new $66.8 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7.93 million in perpetuity. There are three financing options: A new issue of common stock: The required return on the company’s new equity is 15.2 percent. A new issue of 20-year bonds: If the company issues these new bonds at an annual coupon rate of 7.1 percent, they will sell at par. Increased use of accounts payable financing: Because this financing is part of the company’s ongoing daily business, the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of .10. (Assume there is no difference between the pretax and aftertax accounts payable cost.) If the tax rate is 23 percent, what is the NPV of the new plant? Note: A negative answer should…
Annamz Corp. is looking at two possible capital structures. Currently, the firm is an all-equity firm with $1.2 million dollars in assets and 200,000 shares outstanding. The market value of each stock is $6.00. The CEO of Annamz is thinking of leveraging the firm by selling $600,000 of debt financing. The cost of debt is 8% annually, and the current corporate tax rate for Annamz is 30%. What is the break-even EBIT for Annamz with these two possible capital structures?
The Giant Machinery has the current capital structure of 65% equity and 35% debt. Its net income in the current year is $250,000. The company is planning to launch a project that will requires an investment of $175,000 next year. Currently the share of Giant machinery is $25/share.If the company is paying a dividend of $2.50/share and tomorrow the stock will go ex-dividend. Calculate the ex-dividend price tomorrow morning. Assuming the tax on dividend is 15%.
BA eBook Tartan Industries currently has total capital equal to $6 million, has zero debt, is in the 25% federal-plus-state tax bracket, has a net income of $4 million, and distributes 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 14.00%. 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%. a. What is the stock's current price per share (before the recapitalization)? Do not round intermediate calculations. Round your answer to the nearest cent. $ b. Assuming that the company maintains the same payout ratio, what will be its stock price following the recapitalization? Assume that shares are repurchased at the price…
Based on market values, Gubler's Gym has an equity multiplier of 168 times. Shareholders require a return of 1179 percent on the company's stock and a pretax return of 5.06 percent on the company's debt. The company is evaluating a new project that has the same risk as the company itself. The project will generate annual aftertax cash flows of $321,000 per year for 9 years. The tax rate is 21 percent. What is the most the company would be willing to spend today on the project? Multiple Choice $1,802,338 $1,953,295 $1,919,325 $1,864,487 $2,264,479
Home Appliances, a large appliance manufacturer, is considering an acquisition of Modern Design, a medium appliance manufacturer. You have been provided with the following information: Home Modern Design Appliances After-tax operating income next year Debt capital ratio $20 million $10 million 20% 0% Cost of debt 4% Net Capex + ANWC $6 million $1.5 million Both companies are in stable growth, growing at 3% a year. The appliance sector has an unlevered beta of 0.8 for large firms and 1 for small and medium size firms. The marginal tax rate for all firms is 30%. Assume constant D/E ratio to both firms in the equilibrium. The risk-free rate is 3%, and the expected market risk premium is 6%. a. What is the Enterprise Value of Home Appliance as a stand-alone company? b. What is the Enterprise Value of Modern Design as a stand-alone company? c. Home Appliance plans to acquire the entire firm of Modern Design and integrate it into its own business. It will pay a 30% premium on the owner's…
Mokoko Ltd. is considering a number projects and thus need to estimate its cost of capital in order to estimate their NPV. The company’s current dividend is $2.25 per share, which has grown steadily at 6% each year for over a decade and is expected to continue doing so. Its stock currently trades at $26 and there are 2 million shares outstanding. The company’s 100,000 preferred shares trade at $22 and pay annual dividends of $3. Cash and marketable securities on the company’s balance sheet total $30.5 million and the firm pays a tax rate of 30%. Their existing long-term debt (face value of $100 million, semi-annual payments) pays a 9.5% coupon and has 12 years remaining before maturity. Due to current conditions, the required rate of return (yield to maturity) on this debt is 11% and any new debt issuance would be required to offer the same yield to investors (there is no term premium for 1 year vs 12 year debt). What is Mokoko Ltd's Debt/Equity ratio? Assuming the firm wants to…
You are valuing Soda City Inc. It has $129 million of debt, $79 million of cash, and 179 million shares outstanding. You estimate its cost of capital is 10.1%. You forecast that it will generate revenues of $723 million and $777 million over the next two years, after which it will grow at a stable rate in perpetuity. Projected operating profit margin is 31%, tax rate is 24%, reinvestment rate is 43%, and terminal EV/FCFF exit multiple at the end of year 2 is 11. What is your estimate of its share value? Round to one decimal place.

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