The following information applies to Bright Techtronics:
The company is considering a recapitalization where it would issue $250,000 worth of new debt and use the proceeds to buy back $250,000 worth of common stock. The buyback will be undertaken at the pre-recapitalization share price ($20.00). The recapitalization is not expected to have an effect on operating income or the tax rate. After the recapitalization, the company's interest expense will be $55,000.
Assume that the recapitalization has no effect on the company's price earnings (P/E) ratio. What is the expected price of the company's stock following the recapitalization?

Question

The following information applies to Bright Techtronics:
  The company is considering a recapitalization where it would issue $250,000 worth of new debt and use the proceeds to buy back $250,000 worth of common stock. The buyback will be undertaken at the pre-recapitalization share price ($20.00). The recapitalization is not expected to have an effect on operating income or the tax rate. After the recapitalization, the company's interest expense will be $55,000.
Assume that the recapitalization has no effect on the company's price earnings (P/E) ratio. What is the expected price of the company's stock following the recapitalization?

Quizplus · Accepted Answer

The Answer of The following information applies to Bright Techtronics:
  The company is considering a recapitalization where it would issue $250,000 worth of new debt and use the proceeds to buy back $250,000 worth of common stock. The buyback will be undertaken at the pre-recapitalization share price ($20.00). The recapitalization is not expected to have an effect on operating income or the tax rate. After the recapitalization, the company's interest expense will be $55,000.
Assume that the recapitalization has no effect on the company's price earnings (P/E) ratio. What is the expected price of the company's stock following the recapitalization?

The Following Information Applies to Bright Techtronics