Stock price after repurchase
Not what you're looking for?
A consultant has collected the following information regarding Gannette Publishing:
Total Assets: 6,000 million
Operating income (EBIT): 400 million
Interest Expense: 0 million
Net income: 280 million
Share Price: 32
Tax Rate: 40 percent
Debt Ratio: 0 percent
Market/Book ratio: 1.00x
EPS = DPS $3.20
The company has no growth opportunities ( g = 0), so the company pays out all of its earnings as dividends (EPS = DPS). Gannette's stock price can be calculated by simply dividing earnings per share by the required return on equity capital, which currently equals the WACC because the company has no debt.
The consultant believes that the company would be much better off if it were to change its capital structure to 40 percent debt and 60 percent equity. After meeting with investment bankers, the consultant concludes that the company could issue $1,200 million of debt at a before-tax cost of 7 percent, leaving the company with interest expense of $84 million. The $1,200 million raised from the debt issue would be used to repurchase stock at $32 per share. The repurchase will have no effect on the firm's EBIT; however, after the repurchase, the cost of equity will increase to 11 percent. If the firm follows the consultant's advice, what will be its estimated stock price after the capital structure change? You will receive 10 points each for calculating the current number of shares outstanding currently, the number of shares outstanding after repurchase, the new EPS after repurchase, and the new stock price.
You must show all calculations for full credit.
Purchase this Solution
Solution Summary
The solution explains how to calculate the stock price after stock repurchase
Solution Preview
EPS = Net Income(NI)/Number of shares outstanding
The current number of shares outstanding = NI/EPS = $280 million/$3.20 = 87.5 million shares.
The ...
Purchase this Solution
Free BrainMass Quizzes
Social Media: Pinterest
This quiz introduces basic concepts of Pinterest social media
Business Processes
This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.
Transformational Leadership
This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.
Production and cost theory
Understanding production and cost phenomena will permit firms to make wise decisions concerning output volume.
Basics of corporate finance
These questions will test you on your knowledge of finance.