Question

The Anson Jackson Court Company (AJC) currently has $200,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6%. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero growth company. AJC's current cost of equity is 8.8%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00. Refer to the data for the Anson Jackson Court Company (AJC). Now assume that AJC is considering changing from its original capital structure to a new capital structure with 50% debt and 50% equity. If it makes this change, its resulting market value would be $820,000. What would be its new stock price per share?
a. $58
b. $60
c. $59
d. $61
e. $62

Answer 1

Answer:

e. $62

Explanation:

EBIT = $100,000

interests = $12,000

tax rate 40%

net income = ($100,000 - $12,000) x 60% = $52,800

value of shareholders' equity = $52,800 / 8.8% = $600,000

stock price $600,000 / 10,000 = $60

issue $200,000 to buy back 3,334 stocks, total debt $400,000)

total market value = $820,000

value of stockholders' equity  = $820,000 /2 = $410,000

stock price = $410,000 / 6,666 stocks = $62