Problem:
A consultant has collected the following information regarding Y publishing: total assets 4,000 million; operating income (EBIT $300 million; interest expense 0 million; net income $180 million; share price $32; tax rate 40%; debt ration 0%; WACC: 10%; market/ book ratio 1.00X; EPS = DPS $3.20
The company has no growth opportunities (g=0), so the company pays out all of its earnings as dividends (EPS = DPS). Young's stock price can be calculated by simply dividing earnings per share by the required return on equity capital, which currently equals the WACC because the company has no debt. The consultant believes the company would be much better off if it were to change its capital structure to 40% debt and 60% equity. After meeting with investment bakers, the consultant concludes that the company could issue $1,200 million of debt at a before-tax cost of 7%, leaving the company with interest expense of $84 million. The $1,200 million raised from the debt issue would be use to repurchase stock at $32 per share. The repurchase will have no effect on the firm's EBIT; however, after the repurchase, the cost of equity will increase to 11%. If the firm follows the consultant's advice, what will be its estimated stock price after the capital structure change?
Current number of shares outstanding? Number of shares outstanding after repurchase? New EPS after repurchase? & New stock price?