Question

Anson Jackson Court Company (AJC) The Anson Jackson Court Company (AJC) currently has $200,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6%. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero growth company. AJC'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 $60.00. Refer to the data for the Anson Jackson Court Company (AJC). Now assume that AJC is considering changing from its original capital structure to a new capital structure with 50% debt and 50% equity. If it makes this change, its resulting market value would be $820,000. What would be its new stock price per share?

Answer 1

The new stock price per share would be $62

Step-by-step explanation:

In order to calculate the new stock price per share we would have to calculate first the value of the firm as follows:

value of the firm=value of equity+value of debt

value of the firm=(60*10,000)+$200,000

value of the firm=$800,000

If the company makes 50% debt and 50% equity, the market value will increase to $820,000 that is value of equity=$820,000-$200,000=$620,000

Therefore, new stock price per share will be=$620,000/10,000

new stock price per share=$62