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 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?
A) 4,250
B) 4,500
C) 4,750
D) 5,000
E) 5,250

Question

Quizplus · Accepted Answer

First, find the number of shares remaining: n = S/P = $336,000/$64 = 5,250. The number of repurchased shares is the original number of shares minus the resulting number of shares: # repurchased = 10,000 σ 5,250 = 4,750. Alternatively, number of shares repurchased is equal to the debt used to repurchase stock divided by the price per share: # repurchased = ($504,000 σ $200,000)/$64 = 4,750.

The Anson Jackson Court Company (AJC) Currently Has $200,000 Market