The following information applies to RTC Logistics Ltd.: Operating income (EBIT) = RM300,000 Shares outstanding = 120,000 shares Debt = RM100,000 EPS = RM1.45 Interest expense = RM10,000 Stock price = RM17.40 Tax rate = 40% The company is considering recapitalization where it would issue RM348,000 worth of new debt and use the proceeds to buy back RM348,000 worth of common stock. The buyback will be undertaken at the pre-recapitalization share price of RM17.40 per share. The recapitalization is not expected to have an effect on operating income or the tax rate. After the recapitalization, the company’s total interest expense will be RM50,000. Required: Assume that the recapitalization has no effect on the company’s price earnings (P/E) ratio. What is the expected price of the company’s stock following the recapitalization? Should RTC proceed with the recapitalization exercise? Explain.
The following information applies to RTC Logistics Ltd.:
Operating income (EBIT) = RM300,000
Shares outstanding = 120,000 shares
Debt = RM100,000
EPS = RM1.45
Interest expense = RM10,000
Stock price = RM17.40
Tax rate = 40%
The company is considering recapitalization where it would issue RM348,000 worth of new debt and use the proceeds to buy back RM348,000 worth of common stock. The buyback will be undertaken at the pre-recapitalization share price of RM17.40 per share. The recapitalization is not expected to have an effect on operating income or the tax rate. After the recapitalization, the company’s total interest expense will be RM50,000.
Required:
Assume that the recapitalization has no effect on the company’s price earnings (P/E) ratio. What is the expected price of the company’s stock following the recapitalization? Should RTC proceed with the recapitalization exercise? Explain.
Step by step
Solved in 2 steps
