Johnson, Inc. has 4.0 million shares of common stock outstanding and is subject to a corporate tax rate of 21 percent. The firm currently has no debt. The expected annual earnings before taxes of $3.1 million in perpetuity and it distributes all of its earnings as dividends at the end of each year. The current required return on the firm's equity is 9.5 percent. The firm is planning a recapitalization under which it will issue $6 million of perpetual 6 percent debt and use the proceeds to buy back shares. 

a.    What is the price per share prior to announcement?
b.    What is the value of the firm and price per share uder APV method after the recapitalization plan is announced? 
c.    How may share will be repurchased? What is the price per share after the completion of the repurchase program? 

Answer rating: 100% (QA)

a To calculate the price per share prior to the announcement we can use the dividend discount model Price per share Dividend Required return Growth ra... View the full answer