Recapitalization, Current Price per share and Stock Value

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Kenzo13

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May 2, 2011
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Facts: Company currently has no debt and 100% financed by equity, EBIT is $1 MIL and it has 1 MIL shares outstanding, tax rate is 40%, company expects ZERO growth and hence all its earnings are paid out as dividends into perpetuity. the current return on equity is 12%. Its contemplating recapitaliztion by issuing $1.5 MIL in new 8% debt. The proceeds would be used to buy back equity or issue and extraordinary dividend.

What is the current Price Per Share(PPS) and what is the current value of the unlevered firm?

How many share could the $1.5 MIL purchase at the new PPS?

Assume the residual from the loan of 1.5 MIL was paid as a dividend. What would be the price of the stock on the ex-dividend day assuming before personal taxes?
 
Re: Recapitalization, Current Price per share and Stock Valu

Please get used to speaking english, rather than jargon.

Define terms, no matter how well-known you think they are:

EBIT

That looks like the only one on this pass.

Next, please show some work. So far, all you've demonstrated is the ability to type. We'll need more than that.
 
Re: Recapitalization, Current Price per share and Stock Valu

EBIT Earnings Before Intrest and tax. All the others I did. Your tone is rude. You should treat others with respect not talk down to us. We are trying to get better.

I think the current PPS is $5 but im not sure I got that by taking the $600,000 Net Income I derived by 12% im not sure if return on equity equals cost of capital or not though.
 
Re: Recapitalization, Current Price per share and Stock Valu

If anyone has the formulas to help solve these that would be great. I am good with problems I am having a very hard time finding any formulas that can help me solve these.
 
Re: Recapitalization, Current Price per share and Stock Valu

1) My tone is not rude. Whatever you read as rude, simply don't.
2) No one is talking down to anyone. Feel free to assume that they are just questions. Answer them.
3) Truth and honesty often are mistaken for rudeness and arrogance. Let's just not assume that.

Okay, let's see how far we get...

Q) I'm a little puzzled by the lack of a term on the loan. Do we have ALL the facts? How do you know the future tax savings if you cannot split interest payments from capital payments?
 
Re: Recapitalization, Current Price per share and Stock Valu

Kenzo13 said:
I am good with problems I am having a very hard time finding any formulas that can help me solve these.
Click to expand...
Are you learning this stuff on your own, or attending finance classes?
 
Re: Recapitalization, Current Price per share and Stock Valu

This was all the information given. We are able to make our own assumptions if need be we just need to specifiy what they are.

Yes this is for a finance class.
 
Re: Recapitalization, Current Price per share and Stock Valu

Walk through it.

What's the current stock price?
When recapitalizing with debt, which direction do you expect the stock price to go?
How long will we structure the debt?

It's a start.
 
Re: Recapitalization, Current Price per share and Stock Valu

Kenzo13 said:
This was all the information given. We are able to make our own assumptions if need be we just need to specifiy what they are.
Click to expand...
SOOOooooo....what are YOUR assumptions.

Did you look at sites like: http://en.wikipedia.org/wiki/Earnings_b ... _and_taxes

Well, regardless, is what you actually posted exactly a problem given to you by your teacher?
I mean: EXACTLY worded that way?

As example, you typed: "EBIT is $1 MIL "
means Earnings Before Interest and Taxes were $1,000,000? For current fiscal year? Projected?

If you think your post is 100% CLEAR and we're too stupid to understand it,
try posting same at another site and see what you get...
 
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