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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Question
- You have assets of Rs.7 million with no debt, and the tax is 40%. Your net income is Rs.2 million, and you pay out 40% of earnings as dividends. Net income will grow at a constant rate of 5% per year, the outstanding shares are 200,000, and the current WACC is 15.40%. You are considering a change in capital structure with the issuance of Rs.1 million in debt which will be used to repurchase shares. After this change, your before-tax cost of debt will be 11% and the
cost of equity will be 16.5%. What is the stock’s current price per share before change?
Expert Solution
Step 1
Stock price:
- It is the current market value of the share of stock at which it is traded.
Information Provided:
WACC = 15.40%
Net Income = 2 million
Dividend = 40% of earnings
Constant growth rate = 5%
Shares outstanding = 200,000
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