Exhibit 16.4 The Anson Jackson Court Company (AJC) currently has $200,000 market

Question

Exhibit 16.4 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 Exhibit 16.4. Now assume that AJC is considering changing from its original capital structure to a new capital structure that results in a stock price of $64 per share. The resulting capital structure would have a $336,000 total market value of equity and a $504,000 market value of debt. How many shares would AJC repurchase in the recapitalization?

Explanation / Answer

Total Number of shares outstanding now would be =336000/64 =5250

Number of shares prior to recaptilization =10000

Hence share brought back = 10000-5250 =4750

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