The Anson Jackson Court Company (AJC) currently has $200,000 market value (and b
ID: 2696170 • 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?
Explanation / Answer
New WACC is 7 * 0.6(post tax ) * 0.4 + 9.5 * 0.6 = 7.38%
Value of the company is 813,008
Hence b)7.38%; $813,008
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