Tempquin Motors is an all-equity firm with a total market value of $260 million. It's annual...

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Tempquin Motors is an all-equity firm with a total market value of $260 million. It's annual before tax operating income (EBIT) is $39.5 million and expected to be stable for the distant future. The firm has 10 million shares outstanding. Tempquin has no future growth opportunities so pays out all its earnings as dividends. The firm is contemplating a recapitalization plan which involves borrowing $85 million in debt at the rate of 4.6% and using the proceeds to buy back some of its shares. This plan will not alter the size or capability of the operations, so operating income is expected to remain unchanged. The plan will also not affect its dividend payout policy. Assume a marginal tax rate of 28.0% and no other capital market imperfections. (a) What is the dividend per share before the recapitalization? $ (Give answer to 4 decimal places) (b) What would be the dividend per share if the recapitalization goes ahead? (Give answer to 4 decimal places) $ (c) A shareholder owns 500 Tempquin shares and does not sell them during the buyback. What will be the increase in total dividends the shareholder can expect to receive from the change in the firm's capital structure? $ (Give answer to 2 decimal places) Tempquin Motors is an all-equity firm with a total market value of $260 million. It's annual before tax operating income (EBIT) is $39.5 million and expected to be stable for the distant future. The firm has 10 million shares outstanding. Tempquin has no future growth opportunities so pays out all its earnings as dividends. The firm is contemplating a recapitalization plan which involves borrowing $85 million in debt at the rate of 4.6% and using the proceeds to buy back some of its shares. This plan will not alter the size or capability of the operations, so operating income is expected to remain unchanged. The plan will also not affect its dividend payout policy. Assume a marginal tax rate of 28.0% and no other capital market imperfections. (a) What is the dividend per share before the recapitalization? $ (Give answer to 4 decimal places) (b) What would be the dividend per share if the recapitalization goes ahead? (Give answer to 4 decimal places) $ (c) A shareholder owns 500 Tempquin shares and does not sell them during the buyback. What will be the increase in total dividends the shareholder can expect to receive from the change in the firm's capital structure? $ (Give answer to 2 decimal places)

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Lets calculate the dividend per share before and after the recapitalization a Dividend per share bef... View the full answer