1) Tapley Inc. presently has total capital equal to= $4 million, has zero debt, is in 40% federal-plus-state tax bracket, has a net income of= $4 million, and pays out 40% of its earnings as dividends. Net income is expected to grow at the constant rate of 3% per year, 340,000 shares of stock are outstanding, and present WACC is= 13.50%.
The company is considering recapitalization where it will issue $1 million in debt and use proceeds to repurchase stock.
Investment bankers have approximate that if company goes through with recapitalization, its before-tax cost of debt will be= 11% and its cost of equity will increase to= 16.5%.
i) Determine the stock's present price per share (before recapitalization)?
ii) Supposing that company maintains same payout ratio, compute its stock price following recapitalization. Suppose that shares are repurchased at a price computed in Part i.