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 $4,150,000 throughout the foreseeable future. Todd also pays out all its earnings as dividends (that is, EPS = DPS).
1.) 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?
2) Todd's CFO is suggesting that the firm issue $2,000,000 more debt and use the proceeds to repurchase some of its common stock. Assume the firm can repurchase shares at its current stock price. How many shares can Todd repurchase?
3.) 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 oustanding debt. What is Todds expected stock price after the recapitalization?