You own 1,000 shares of a company, M&N Limited which is all-equity financed with 10,000 outstanding. The market price for each share is currently $40. M& N Limited follows a constant dividend policy, implying that it will pay the same dividend per share each year indefinitely. 4 The dividend per share is $4.50 per year. The company is debating of converting into a 60% debt capital structure by using the proceeds from debt to repurchase shares and the expected dividend per share is $5.85.The interest rate on borrowings in general is 9% per annum. Ignore taxes. (a) What is the value of your personal cash flow in M&N Limited based on the current capital structure and dividend policy of the company? (b) What is the value of your personal cash flow in M&N Limited, based on the proposed 60% debt capital structure and dividend policy of the company? How can you use homemade leverage to obtain the higher cash flow from the proposed 60% debt capital structure, if M&N Limited continues to be an unlevered firm, that is, maintain its current capital structure? Substantiate your answer through relevant computations.

You own 1,000 shares of a company, M&N Limited which is all-equity financed with 10,000 outstanding. The market price for each share is currently $40. M& N Limited follows a constant dividend policy, implying that it will pay the same dividend per share each year indefinitely. 4 The dividend per share is $4.50 per year. The company is debating of converting into a 60% debt capital structure by using the proceeds from debt to repurchase shares and the expected dividend per share is $5.85.The interest rate on borrowings in general is 9% per annum. Ignore taxes. (a) What is the value of your personal cash flow in M&N Limited based on the current capital structure and dividend policy of the company? (b) What is the value of your personal cash flow in M&N Limited, based on the proposed 60% debt capital structure and dividend policy of the company? How can you use homemade leverage to obtain the higher cash flow from the proposed 60% debt capital structure, if M&N Limited continues to be an unlevered firm, that is, maintain its current capital structure? Substantiate your answer through relevant computations.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter15: Dividend Policy

Section: Chapter Questions

Problem 4P

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You own 1,000 shares of a company, M&N Limited which is all-equity financed with 10,000outstanding. The market price for each share is currently $40. M& N Limited follows a constantdividend policy, implying that it will pay the same dividend per share each year indefinitely.The dividend per share is $4.50 per year. The company is debating of converting into a 60%debt capital structure by using the proceeds from debt to repurchase shares and the expecteddividend per share is $5.85.The interest rate on borrowings in general is 9% per annum. Ignoretaxes.You are required to answer the following questions: (a) What is the value of your personal cash flow in M&N Limited based on the current capitalstructure and dividend policy of the company? (b) What is the value of your personal cash flow in M&N Limited, based on the proposed 60%debt capital structure and dividend policy of the company?(c) How can you use homemade leverage to obtain the higher cash flow from the proposed…
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