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The following information applies to RTC Logistics Ltd.: The company is considering recapitalization

Economics

The following information applies to RTC Logistics Ltd.: The company is considering recapitalization where it would issue $348,000 worth of new debt and use the proceeds to buy back $348,000 worth of common stock. The buyback will be undertaken at the pre-recapitalization share price of $17.40 per share. The recapitalization is not expected to have an effect on operating income or the tax rate.  After the recapitalization, the company’s total interest expense will be $50,000. Required: Assume that the recapitalization has no effect on the company’s price earnings (P/E) ratio. What
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The following information applies to RTC Logistics Ltd.: The company is considering recapitalization where it would issue $348,000 worth of new debt and use the proceeds to buy back $348,000 worth of common stock. The buyback will be undertaken at the pre-recapitalization share price of $17.40 per share. The recapitalization is not expected to have an effect on operating income or the tax rate.  After the recapitalization, the company’s total interest expense will be $50,000. Required: 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? Should RTC proceed with the recapitalisation exercise? Explain.

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