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Tapley Inc. currently has assets of $4 million, zero debt, is in the 40% federal-plus-state tax bracket, has a net income of $2 million, and pays out 40% of its earnings as dividends. Net income is expected to grow at a constant rate of 4% per year. 220,000 shares of stock are outstanding, and the current WACC is 12.50%.
The company is considering a recapitalization where it will issue $4 million in debt and use the proceeds to repurchase stock. Investment bankers have estimated that if the company goes through with the recapitalization, its before-tax cost of debt will be 11% and its cost of equity will rise to 14.5%.
a. What is the stock's current price per share (before the recapitalization)? Round your answer to two decimal places.
b. Assuming that the company maintains the same payout ratio, what will be its stock price following the recapitalization? Round your answer to two decimal places.
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XYC Company is issuing preferred stock yielding at 10 percent, and ABC Corp. is planning buying the stock. XYZ's tax rate is 20 percent and ABC's tax rate is 34%.
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