The following information applies to RTC Logistics Ltd.: Operating income (EBIT)= $300,000 Shares outstanding = 120,000 shares Debt = $100,000 EPS = $1.45 Interest expense = $10,000 Stock price = $17.40 Tax rate = 40% The company is considering recapitalization where it would issue $348,000 worth of new debt and use the proceeds to buy back $348,000 worth of common stock. The buyback will be undertaken at the pre-recapitalization share price of $17.40 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 expense will be $50,000. Number of shares bought back = 348,000/17.40 = 20,000 shares. 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 recapitalisation exercise? Explain.
The following information applies to RTC Logistics Ltd.:
Operating income (EBIT)= $300,000
Shares outstanding = 120,000 shares
Debt = $100,000
EPS = $1.45
Interest expense = $10,000
Stock price = $17.40
Tax rate = 40%
The company is considering recapitalization where it would issue $348,000 worth of new debt and use the proceeds to buy back $348,000 worth of common stock. The buyback will be undertaken at the pre-recapitalization share price of $17.40 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 expense will be $50,000.
Number of shares bought back = 348,000/17.40 = 20,000 shares.
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 recapitalisation exercise? Explain.
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