A) Calculate the current price of the firm's stock. B) How many shares can the firm repurchase?
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A) Calculate the current price of the firm's stock.
B) How many shares can the firm repurchase?
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Ramsey Corp. currently has an 12% weighted average cost of capital (WACC) and no debt. The firm just paid a $3.00 dividend per share and maintains a constant 5% growth rate in its dividends. There are 15 million shares outstanding and the firm's tax rate is 25%. You are analyzing the impact of recapitalizing the firm. Specifically, the firm is looking at issuing 300,000 bonds (note: this is the number of bonds) and using the proceeds to repurchase stock. The bonds would be 15 year, $1,000 par value bonds with an 8 percent coupon rate, paid semiannually. The yield to maturity on similar bonds is approximately 7.44%. Assume you are in the Modigliani and Miller (M&M) framework and those assumptions hold. Ramsey Corp. currently has an 12% weighted average cost of capital (WACC) and no debt. The firm just paid a $3.00 dividend per share and maintains a constant 5% growth rate in its dividends. There are 15 million shares outstanding and the firm's tax rate is 25%. You are analyzing the impact of recapitalizing the firm. Specifically, the firm is looking at issuing 300,000 bonds (note: this is the number of bonds) and using the proceeds to repurchase stock. The bonds would be 15 year, $1,000 par value bonds with an 8 percent coupon rate, paid semiannually. The yield to maturity on similar bonds is approximately 7.44%. Assume you are in the Modigliani and Miller (M&M) framework and those assumptions hold.
Expert Answer:
Answer rating: 100% (QA)
A To calculate the current price of the firms stock we can use the dividend discount model DDM Curre... View the full answer
Related Book For
Financial Management Theory and Practice
ISBN: 978-1305632295
15th edition
Authors: Eugene F. Brigham, Michael C. Ehrhardt
Posted Date:
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