The Simon Company (SIMON) currently has $300,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6%. Its earnings before interest and taxes (EBIT) are $150,000, and it is a zero growth company. SIMON’s current cost of equity is 8.8%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $90.00.Now assume that SIMON is considering changing from its original capital structure to a new capital structure that results in a stock price of $96 per share. The resulting capital structure would have a $504,000 total market value of equity and a $756,000 market value of debt. How many shares would SIMON repurchase in the recapitalization?
We have been provided with the information that
Simon Company (SIMON) currently has $300,000 market value
carrying a coupon rate of 6%.
EBIT are $150,000,
zero growth company.
current cost of equity is 8.8%,
tax rate is 40%.
The firm has 10,000 shares of common stock outstanding
selling at a price per share of $90.00.
Now assume that SIMON is considering changing from its original capital structure to a new capital structure that results in a stock price of $96 per share.
The resulting capital structure would have a $504,000 total market value of equity and a $756,000 market value of debt.
Number of Shares Remaining:
Number of shares n = Market value of equity ÷ price per share
n = S / P
= $504,000 ÷ $96
= 5,250.
The number of repurchased shares is the original number of shares minus the
resulting number of shares:
Number of Shares AJC would repurchase
= 10,000 – 5,250
= 4,750.
