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Barns Brother's capital structure is 100% equity and 0% debt.
Currently there are 100,000 shares of common stock outstanding.
Barns has decided to change its capital structure by buying back shares of common stock in a recapitalization effort.
The firm’s Share price is $40.00 and its EPS is $3.00.
The company can borrow $1,000,000 at 9%.
EBIT is expected to be $500,000 and the tax rate is 40%.
How much will the capitalization increase or decrease shareholder wealth?
$0.28 per share
$0.00 per share
$0.36 per share
$0.17 per share
What are the required rates of returns on both stocks using the CAPM model? What are the expected rates of return of both stocks using the dividend growth model. Which stock would you recommend to purchase or sell? Why?
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