Tartan Industries currently has total capital equal to $4million, has zero debt, is in the 40% federal-plus-state taxbracket, has a net income of $2 million, and distributes 40% of itsearnings as dividends. Net income is expected to grow at a constantrate of 6% per year, 190,000 shares of stock are outstanding, andthe current WACC is 12.80%.
The company is considering a recapitalization where it willissue $1 million in debt and use the proceeds to repurchase stock.Investment bankers have estimated that if the company goes throughwith the recapitalization, its before-tax cost of debt will be 11%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 intermediatecalculations. Round your answer to the nearest cent. $
B.) Assuming that the company maintains thesame payout ratio, what will be its stock price following therecapitalization? Assume that shares are repurchased at the pricecalculated in part a. Do not round intermediate calculations. Roundyour answer to the nearest cent.
