The Anson Jackson Court Company (AJC) currently has $200,000 market value (and b
ID: 2645318 • Letter: T
Question
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.
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?
$58
$59
$60
$61
$62
$58
$59
$60
$61
$62
Explanation / Answer
Total Market Value of Old Capital Structure: 200,000 + (10,000 x 60) =$800,000
Total Market Value of New Capital Structure = $820,000
Net Increase = $20,000, Per Share Increase = 20,000 / 10,000 = $2
New Stock price Per Share = 60 + 2 = $62
So, the Correct Option is $62
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