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  • Tangshan Mining Company

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    Md. Habibullah
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    Tangshan Mining is considering changing its capital structure from 40% debt to 50% debt. Under the current structure, dividends are $4.89 per share growing at 5% indefinitely. The required return is 10.89%. Under the proposed structure, dividends would be $5.24 per share growing at 6% indefinitely, but the required return would rise to 11.34%. The current share price is $83.02 and would rise to $108.26 under the new structure. Therefore, Tangshan Mining should make the change to maximize shareholder value.

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    Tangshan Mining is considering changing its capital structure from 40% debt to 50% debt. Under the current structure, dividends are $4.89 per share growing at 5% indefinitely. The required return is 10.89%. Under the proposed structure, dividends would be $5.24 per share growing at 6% indefinitely, but the required return would rise to 11.34%. The current share price is $83.02 and would rise to $108.26 under the new structure. Therefore, Tangshan Mining should make the change to maximize shareholder value.

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    © All Rights Reserved
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    70 views1 page

    Tangshan Mining Company

    Uploaded by

    Md. Habibullah
    Tangshan Mining is considering changing its capital structure from 40% debt to 50% debt. Under the current structure, dividends are $4.89 per share growing at 5% indefinitely. The required return is 10.89%. Under the proposed structure, dividends would be $5.24 per share growing at 6% indefinitely, but the required return would rise to 11.34%. The current share price is $83.02 and would rise to $108.26 under the new structure. Therefore, Tangshan Mining should make the change to maximize shareholder value.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    Q # 3: Tangshan Mining Company must choose its optimal capital structure.

    Currently, the firm has a 40 percent


    debt ratio and the firm expects to generate a dividend next year of $4.89 per share and dividends are expected
    to grow at a constant rate of 5 percent for the foreseeable future. Stockholders currently require a 10.89
    percent return on their investment. Tangshan Mining is considering changing its capital structure if it would
    benefit shareholders. The firm estimates that if it increases the debt ratio to 50 percent, it will increase its
    expected dividend to $5.24 per share. Because of the additional leverage, dividend growth is expected to
    increase to 6 percent and this growth will be sustained indefinitely. However, because of the added risk, the
    required return demanded by stockholders will increase to 11.34 percent.
    (a) What is the value per share for Tangshan Mining under the current capital structure?
    (b) What is the value per share for Tangshan Mining under the proposed capital structure?
    (c) Should Tangshan Mining make the capital structure change? Explain.

    Answer:

    a. Po= 4.89/(o.1089-0.05)= $83.02 (Current price)


    b. Po=5.24/(0.1134-0.065)= $108.26 (price of stock if the capital structure charge)
    c. Yes Tangshan Mining should make the change because it will maximize share price

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