Question

Summers, Inc., is an unlevered firm with expected annual earnings before taxes of $25.7 million in perpetuity. The current required return on the firm’s equity is 13 percent and the firm distributes all of its earnings as dividends at the end of each year. The company has 1.96 million shares of common stock outstanding and is subject to a corporate tax rate of 23 percent. The firm is planning a recapitalization under which it will issue $35.9 million of perpetual 5.8 percent debt and use the proceeds to buy back shares.

What is the price per share after the recapitalization and repurchase? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Use the flow to equity method to calculate the value of the company’s equity after the recapitalization. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.)

Answer 1

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