The following information applies to RTC Logistics Ltd.: Operating income (EBIT) = $300,000 Shares outstanding = 120,000 shares Debt = $100,000 EPS = $1.45 Interest expense = $10,000 Stock price =...

The following information applies to RTC Logistics Ltd.:

Operating income (EBIT)                                       = $300,000

Shares outstanding                                                  =   120,000 shares

Debt                                                                              = $100,000

EPS                                                                                 = $1.45

Interest expense                                                      = $10,000

Stock price = $17.40

Tax rate                                                                        =   40%

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