Price per share for Corporation

Question

For XYZ Corporation debt-to-equity ratio, marginal tax rate, and dividend payout ratio are all of 40%. The cost of debt is 10%. Cambria contains 1 million shares of common stock, and $25 million in long-term bonds. Its dividend is $1 per share. Determine the EBIT and the price per share for XYZ.

Answer 1

Debt-to-equity ratio = 40%
D = $25 million
E = $25/0.4 = $62.5 million

XYZ has 1 million shares of common stock and its current market value is $62.5 million. Hence the price per share is $62.5.

Dividend payout ratio = DPS/EPS = 0.4
1/EPS = 0.4
EPS = $2.5

Earnings available to common shareholders = $2.5*1 million shares = $2.5 million
Profit before tax = $2.5 million/(1 – marginal tax rate) = $2.5 million/(1 – 0.4)
Profit before tax = $2.5 million/0.6 = $4.167 million
Interest expense = $25 million*10% = $2.5 million
EBIT = profit before tax + interest expense = $4.167 + $2.5 = $6.667 million

Thus EBIT is $6.667 million and price per share for XYZ is $62.50