2. Now assume the firm is considering issuing $1.2m in debt at before-tax cost of 7%,...

2. Now assume the firm is considering issuing $1.2m in debt at before-tax cost of 7%, using the proceeds to repurchase stock at the share price from #1. If this capital structure adjustment results in a debt-to-equity ratio of .25 for the firm, what will the stock’s price be after recapitalization?

Consider an all-equity firm with 125,000 shares outstanding. Assume that EBIT=800,000 and that EBIT will remain constant, the firm pays out all profits (EPS = dividends per share) as dividends, and that its tax rate is 40%. If the firm’s beta is 1.1, the risk-free rate is 4%, and the market risk premium is 6%, what is the firm’s stock price according to the dividend growth model?

Solutions

Expert Solution

Answering the 2nd question here for now, given that the 1st question has some missing information with regards to the share price of the repurchased stock '#1 - is not mentioned'.

Calculate the stock price as per the dividend growth model as follows :

The result of the above table is as follows :

The firm's stock price is $36.23.

jeff jeffy answered 1 year ago

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