Question

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

Answer 1

The answer is "4,750"

Step-by-step explanation:

They have indeed been given the information that we require.

The current market cap for Simon Company (SIMON) is $300,000.

rate= 6%

EBIT=$150,000

The business has no plans to expand.

The current cost of capital is 8.8%,

The tax rate is 40%.

The company has 10,000 shares of common stock mostly on market.

The stock is being offered at a $90.00 per share price.

Assume SIMON is considering switching in its current financial performance to one that results in a share price of $96 per share.

The resultant capital structure would have a combined valuation of $504,000 in capital and $756,000 in equity.

Remaining Shares= equity market value / per share price

`n =(S)/(P) \\\\= (\$504,000)/( \$96)\\\\= \$5,250`

The initial number of shares minus the resultant number of shares equals the number of repurchased shares:

AJC will buy back a certain number of shares.

`= 10,000 - 5,250\\\\= 4,750\\`