Finch, Incorporated, is debating whether or not to convert its all-equity capital structure to one that is 20 percent debt. Currently, there are 6,000 shares outstanding and the price per share is $40. EBIT is expected to remain at $12,000 per year forever. The interest rate on new debt is 7 percent, and there are no taxes. a. Allison, a shareholder of the firm, owns 100 shares of stock. What is her cash flow under the current capital structure, assuming the firm has a dividend payout rate of 100 percent? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. b. What will Allison's cash flow be under the proposed capital structure of the firm? Assume she keeps all 100 of her shares. Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. c. Assume that Allison unlevers her shares and re-creates the original capital structure. What is her cash flow now? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. a. Cash flow b. Cash flow c. Cash flow

Finch, Incorporated, is debating whether or not to convert its all-equity capital structure to one that is 20 percent debt. Currently, there are 6,000 shares outstanding and the price per share is $40. EBIT is expected to remain at $12,000 per year forever. The interest rate on new debt is 7 percent, and there are no taxes. a. Allison, a shareholder of the firm, owns 100 shares of stock. What is her cash flow under the current capital structure, assuming the firm has a dividend payout rate of 100 percent? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. b. What will Allison's cash flow be under the proposed capital structure of the firm? Assume she keeps all 100 of her shares. Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. c. Assume that Allison unlevers her shares and re-creates the original capital structure. What is her cash flow now? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. a. Cash flow b. Cash flow c. Cash flow

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Finch, Incorporated, is debating whether to convert its all-equity capital structure to one that is 20 percent debt. Currently, there are 11,000 shares outstanding, and the price per share is $58. EBIT is expected to remain at $24,200 per year forever. The interest rate on new debt is 7.5 percent, and there are no taxes. a. Allison, a shareholder of the firm, owns 200 shares of stock. What is her cash flow under the current capital structure, assuming the firm has a dividend payout rate of 100 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What will Allison's cash flow be under the proposed capital structure of the firm? Assume she keeps all 200 of her shares. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. Assume that Allison unlevers her shares and re-creates the original capital structure. What is her cash flow now? (Do not round intermediate calculations and round your…
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Barry's Ltd. is all equity financed with 18,000 shares outstanding and each share sells for $22. The EBIT of the company is $50,000. The company is debating of converting into a 40% debt capital structure, with 6% interest per annum. The cost of capital is currently 10%. Ignore taxes. You are required to answer the following: (a) What is the current market value of the company? (b) What is the market value of debt in the proposed debt capital structure? (c) How many shares must be repurchased in the proposed levered company?

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