Tartan Industries Currently has total capital equal to $10 million, has zero clebt, is in the 25% federal Plus state tex bracket, has a net income of $4 million, and distributes 40% of its earnings as dividends. Net income is expected to grow at aya!! Constant rate of 5% per year, 430,000 shares of stock are outstanding, and the current WACC is... 12.70% The company is considering a recapitalization where it will issue 33 million in debt and use the priceeds to repurchase stock. Investment bankers have estimated that if the company goes through with the Is A recapitalization, its before -tax cost of debt will be 9% and its cost of equity will rise to 16.5%
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Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
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- Tartan Industries currently has total capital equal to $4 million, haszero debt, is in the 40% federal-plus-state tax bracket, has a net income of $1 million, anddistributes 40% of its earnings as dividends. Net income is expected to grow at a constantrate of 3% per year, 200,000 shares of stock are outstanding, and the current WACC is12.30%.The company is considering a recapitalization where it will issue $2 million in debtand use the proceeds to repurchase stock. Investment bankers have estimated that if thecompany goes through with the recapitalization, its before-tax cost of debt will be 10% andits cost of equity will rise to 15.5%.a. What is the stock’s current price per share (before the recapitalization)?b. Assuming that the company maintains the same payout ratio, what will be its stockprice following the recapitalization? Assume that shares are repurchased at the pricecalculated in part a.BA eBook Tartan Industries currently has total capital equal to $6 million, has zero debt, is in the 25% federal-plus-state tax bracket, has a net income of $4 million, and distributes 40% of its earnings as dividends. Net income is expected to grow at a constant rate of 6% per year, 480,000 shares of stock are outstanding, and the current WACC is 14.00%. The company is considering a recapitalization where it will issue $5 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 9% and its cost of equity will rise to 16.5%. a. What is the stock's current price per share (before the recapitalization)? Do not round intermediate calculations. Round your answer to the nearest cent. $ b. Assuming that the company maintains the same payout ratio, what will be its stock price following the recapitalization? Assume that shares are repurchased at the price…Faster Engineering Inc. (FEI) has the following capital structure, which it considers to be optimal:Debt 20%Preferred Stock 15%Common Equity 65%Total 100% FEI’s expected net income this year is $34,285.72, its established dividend payout ratio is 30%, its federalplus-state tax rate is 25%, and investors expect future earnings and dividends to grow at a constant rate of7%. LEI paid a dividend of $4.20 per share last year, and its stock currently sells for $54.00 per share. FEI can obtain new capital in the following ways: (1)New preferred stock with a dividend of $12.00 can be sold to the public at a price of $90.00 per share. (2)Debt can be sold at an interest rate of 11%.a. Determine the cost of each capital component.b. Calculate the WACC.
- b. ABC Inc. finances its operations with 40 percent debt and 60 percent equity. Its net income is $30 million and it has a dividend payout ratio of 30%. Its capital budget is B = $100 million this year. The annual yield on the company's debt is 7% and the company's tax rate is T = 30%. The company's common stock trades at Po = $100 per share, and its current dividend of Do = $4 per share is expected to grow at a constant rate of g = 5% a year. The floatation cost of external equity, if issued, is F = 1.5% of the dollar amount issued. What is the company's weighted average cost of capital?Tartan Industries currently has total capital equal to $4 million, has zero debt, is in the 40% federal-plus-state tax bracket, has a net income of $1 million, and distributes 40% of its earnings as dividends. Net income is expected to grow at a constant rate of 3% per year, 200,000 shares of stock are outstanding, and the current WACC is 12.30%. The company is considering a recapitalization where it will issue $2 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 10% and its cost of equity will rise to 15.5%. What is the stock's current price per share (before the recapitalization)? Assuming that the company maintains the same payout ratio, what will be its stock price following the recapitalization? Assume that shares are repurchased at the price calculated in part a.Tartan Industries currently has total capital equal to $5 million, has zero debt, is in the 25% federal-plus-state tax bracket, has a net income of $1 million, and distributes 40% of its earnings as dividends. Net income is expected to grow at a constant rate of 5% per year, 240,000 shares of stock are outstanding, and the current WACC is 13.00%. 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 9% and its cost of equity will rise to 14.5%. a. What is the stock's current price per share (before the recapitalization)? Do not round intermediate calculations. Round your answer to the nearest cent. $ 73.68 b. Assuming that the company maintains the same payout ratio, what will be its stock price following the recapitalization? Assume that shares are repurchased at the price calculated…
- Tarbox Tobacco Inc. is all equity financed and generates perpetual annual EBIT of $300. Assume that the EBIT, and all other cash flows, occur at year end and that we are currently at the beginning of a year. Assume that Tarbox has a 100% payout rate. Tarbox has 1, 500 shares outstanding. The stock holders of Tarbox require a return of 5%. Assume that the tax rate is 0%. What is the price per share for Tarbox stock? (Round to the nearest whole number.)Tartan Industries currently has total capital equal to $7 million, has zero debt, is in the 25% federal-plus-state tax bracket, has a net income of $4 million, and distributes 40% of its earnings as dividends. Net income is expected to grow at a constant rate of 6% per year, 500,000 shares of stock are outstanding, and the current WACC is 13.80%. The company is considering a recapitalization where it will issue $1 million in debt and use the proceeds to repurchase stock. Investment bankers have estimated that if the company goes through with the recapitalization, it’s before-tax cost of debt will be 11% and its cost of equity will rise to 15.5%. What is the stock's current price per share (before the recapitalization)? Do not round intermediate calculations. Round your answer to the nearest cent. $ Assuming that the company maintains the same payout ratio, what will be its stock price following the recapitalization? Assume that shares are repurchased at the price calculated in part…Tartan Industries currently has total capital equal to $8 million, has zero debt, is in the 25% federal- plus-state tax bracket, has a net income of $4 million, and distributes 40% of its earnings as dividends. Net income is expected to grow at a constant rate of 3% per year, 370,000 shares of stock are outstanding, and the current WACC is 13.10%. The company is considering a recapitalization where it will issue $2 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 15.5%. 264.77 a. What is the stock's current price per share (before the recapitalization)? Do not round intermediate calculations. Round your answer to the nearest cent. $ b. Assuming that the company maintains the same payout ratio, what will be its stock price following the recapitalization? Assume that shares are repurchased at the price…
- XYZ anticipates earning $1,000,000 and paying $200,000 in dividends this year. XYZ's capital structure is 20% debt and 80% equity and its tax rate is 35%. Compute the equity breakpoint to the nearest dollar. Your Answer:Assume that your company is an all-equity firm with 250,000 shares outstanding. The company's EBIT is $2,500,000, and EBIT is expected to remain constant over time. The company pays out all of its earnings each year, so its earnings per share are equal to its dividends per share and this is currently $6.00 per share. The company's tax rate is 40 percent, its current cost of stock, Ks, is 8 percent, and its current stock price is $75 per share. Now assume that the company is considering issuing $3.75 million worth of bonds (at par) and using the proceeds for a stock repurchase. If issued, the bonds would have an estimated yield to maturity of 5 percent or interest of $187,500. The risk-free rate in the economy is 4 percent, and the market risk premium is 5 percent. The company's beta is currently 0.8, but its investment bankers estimate that the company's beta would rise to 0.9 if it proceeds with the recapitalization. Assume that the shares are repurchased at the equilibrium price that…As the chief financial officer of Adirondack Designs, you have the following information: • Next year's expected net income after tax but before new financing $42 million Sinking-fund payments due next year on the existing debt $15 million • Interest due next year on the existing debt $10 million • Common stock price, per share $28.00 • Common shares outstanding 20 million Company tax rate 30% Calculate the firm's times-interest-earned ratio for next year assuming the firm raises $50 million of new debt at an interest rate of 4 percent. 5.83 4.21 ○ 6.38 O 1.25