Question

Your company has made the following forecast for the upcoming year based on the company's current capitalization: Interest expense $ 4,000,000 Operating income (EBIT) $36,000,000 Earnings per share $ 3.84 The company has $40 million worth of debt outstanding and all of its debt yields 10 percent. The company's tax rate is 40 percent. The company's price earnings ratio has traditionally equaled 12.so the company forecasts that under the current capitalization its stock price will be $46,08 at year-end. The company's investment bankers have suggested that the company do a recapitalization. Their suggestion is to issue enough new bonds at a yield of 10 percent to repurchase 1 million shares of common stock. Assume that the stock can be repurchased at today's $43.00 stock price. Assume that the repurchase will have no effect on the company's operating income; however, the repurchase will increase the company's dollar interest expense. Also, assume that as a result of the increased financial risk the company's price earnings ratio will be 11.5 after the repurchase. Given these assumptions, determine the expected year-end stock price if the company proceeds with the recapitalization.

Answer 1

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PV, FV, ANNUITY (Autosaved) Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins Σ AutoSum - Cut AC Wrap Text Calibri 11 General E Copy Fill в IU* Merge & Center Insert Delete Format Paste +.0 .00 .00 0 Conditional Format Cell Sort & Find & % Format Painter Clear Filter Select Formatting as Table Styles Alignment Number Editing Clipboard Font Styles Cells fx RF43 RC RE RA RB RD RF RG RH RI RJ RK 43 44 calculate existing no of shares step 1 45 46 EBIT 36000000 47 INTEREST 4000000 ЕВT 48 32000000 ТАX 49 12800000 19200000 50 NET INCOME 51 52 EPS 3.84 53 5000000 [NET INCOME/EPS] 54 NO OF SHARES 55 56 SHARES REPURCHASED 1000000 step 2 57 4000000 [5000000 1000000] 58 step 3 NO OF SHARES LEFT 59 43000000 [43 X 1000000 SHARES] 60 AMOUNT OF DEBT ISSUED 61 4300000 [43000000 X 10%] INTEREST EXPENSES @ 10% 62 step 4 63 CAP STRU VALUE profit margin loan with points pv, fv, annuity CALCULATOR LOCK BOX DILUTION LOAN OPTIONS DOLLAR COST AVG EXPO NPER APR CPI ear FVA III II Rea erences E 120% + WA 03:34 ENG 04-12-2019

PV, FV, ANNUITY (Autosaved) Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins Σ AutoSum - Cut AS Wrap Text Calibri 11 General Copy Fill в IU* Merge & Center Insert Delete Format Paste +.0 .00 Conditional Format Cell Sort & Find & % .00 0 Format Painter Clear Filter Select Formatting as Table Styles Number Editing Clipboard Font Alignment Styles Cells fx RH68 RC RA RB RD RE RF RG RH RI RJ RK 63 64 REVISED EPS step 5 36000000 65 ЕBIT INTEREST 8300000 [4000000 4300000] 66 67 ЕВT 27700000 68 ТАX 11080000 69 NET INCOME 16620000 70 NO OF SHARES 71 4000000 72 73 EPS 4.155 P/E AFTER RECAPITALIZATION 74 11.5 75 ANSWER PRICE AFTER RECAPITALIZATION 47.78 76 77 78 79 80 81 82 83 CAP STRU VALUE profit margin loan with points pv, fv, annuity CALCULATOR LOAN OPTIONS LOCK BOX DILUTION DOLLAR COST AVG EXPO NPER APR CPI ear FVA III II Rea erences E 120% + WA 03:34 ENG 04-12-2019