FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Question 5

The following information applies to RTC logistics ltd:

Operating income(EBIT)...............=RM300,000

Shares outstanding ........................=120,000

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 peoceeds 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 expenses will be RM50,000

Requirement:

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.

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