Todd Industries currently has about $4,000,000 of debt in its capital structure,

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? (38.10)

QUESTION:

Todd's CFO estimates that the firm's beta after the recapitalization would be 1.15. After the new debt is issued, the firm will be paying an average cost of 11% on its $6,000,000 of outstanding debt. What is Todd's expected stock price after the recapitalization?

Please show your work. Thanks!

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

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