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 answer to 2 decimal places, e.g., 32.16.)

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
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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
answer to 2 decimal places, e.g., 32.16.)
Answer is complete but not entirely correct.
a. Cash
flow
b. Cash
flow
c. Cash
flow
$
$
440.00
433.40
440.00
Transcribed Image Text: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 answer to 2 decimal places, e.g., 32.16.) Answer is complete but not entirely correct. a. Cash flow b. Cash flow c. Cash flow $ $ 440.00 433.40 440.00
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