Crumpley Co. has $5 M is current assets, zero debt, in 40% tax bracket, net income of $1 M. NI is expected to grow at a constant rate of 5%/year. 200,000 shares outstanding and current WACC of 13.40%. The company is considering a recapitalizaiton where it will issue $1M in debt and use proceeds to repurchase stock. Before-tax cost of debt is 11%, equity will rise to 14.5%. What is the stock's current price/share before recapitalization and following recap (co. maintains same payout ratio)?© BrainMass Inc. brainmass.com November 30, 2021, 2:42 am ad1c9bdddf
Please see the attached file.
Net Income= $1,000,000
Tax rate = 40%
EBIT (1-Tax rate) = Net Income
or EBIT = Net Income / (1-Tax rate)= $1,666,667
growth rate= 5%
Therefore EBIT net year= 1.05 x $1,666,667= $1,750,000
EBIT next year= $1,750,000
Earnings before ...
The solution calculates share price before and after recapitalization.