Todd Industries currently has about $4,000,000 of debt in its capital structure,
ID: 2688128 • Letter: T
Question
Todd Industries currently has about $4,000,000 of debt in its capital structure, on which it pays 10% interest. However, Todd is considering issuing new long-term debt and repurchasing some of its 600,000 outstanding shares. Todd's EBIT will not change and it is expected to stay constant at $5,200,000 throughout the foreseeable future. Todd also pays out all its earnings as dividends (that is, EPS = DPS).
Todd's beta is currently 1.10 and the risk-dree rate and market risk premium are both 6.0%. If the firm's tax rate is 40%, what is Todd's current stock price?
Explanation / Answer
Hi, Please find the answer as follows: EBT = 5200000 - 10%*6000000 = 4600000 Net Income = 4600000*(1-.40) = 2760000 DPS = 2760000/600000 = 4.6 EPS = 4.6 Ke = 6% + 1.35*(6%) = 14.1 Stock Price = 4.6/.141 = 32.62 Thanks, Aman