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Fundamentals of Financial Management See all exercises

Chapter 14, End of Chapter, Problems, Exercise 14-9

Part a Part b

RECAPITALIZATION
 
a. What is the stock's current price per share (before the recapitalization)? 
b. Assuming that the company maintains the same payout ratio, what will be its stock price following the
recapitalization? Assume that shares are repurchased at the price calculated in part a.

Here is the step-by-step explanation, veri ed by an educator:

Step 1 of 3

Identify the total capital (TC), tax rate (T), net income (NI), dividend payout ratio (DPR), growth rate (g), shares outstanding (SO),
and the weighted average cost of capital (WACC)

TC = $4 Million
T = 40%
NI = $1 Million
DPR = 40%
g = 3%
SO = 200,000 shares outstanding
WACC = 12.30% (WACC = rs if debt = 0)

Step 2 of 3

Calculate the current dividends per share (D0) using the variables identi ed in step 1

(N I)(DP R)
D0 =
SO
(1 M illion)(0.40)
=
       200, 000 shares
       = $2 per share

Step 3 of 3

Calculate the price per share (P0) using the variables identi ed in step 1 and the calculated dividends per share (D0) in step 2

D0 (1 + g)
P0 =
rS − g
2(1 + 0.03)
=
      0.1230 − 0.03
      = $22.15 per share

Final answer 숥

$22.15/share

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Page 510 섈 쉋

쇲 P, Ex 14-8 P, Ex 14-10 쇰

Textbook Solutions / Fundamentals of Financial Management / Ch 14, End of Chapter, Ex 14-9

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