Question

Pagemaster Enterprises is considering a change from its current capital structure. The company currently has an all-equity capital structure and is considering a capital structure with 25 percent debt. There are currently 8,100 shares outstanding at a price per share of $50. EBIT is expected to remain constant at $44,000. The interest rate on new debt is 7 percent and there are no taxes. a. Rebecca owns $17,000 worth of stock in the company. If the firm has a 100 percent payout, what is her cash flow? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g.. 32.16.) b. What would her cash flow be under the new capital structure assuming that she keeps all of her shares? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. Suppose the company does convert to the new capital structure. Show how Rebecca can maintain her current cash flow. a. Shareholder cash flow b. Shareholder cash flow c. Number of shares stockholder should sell

Answer 1

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ke - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins - 2x % Cut Σ AutoSum : A Calibri -11AA = = = Dr Wrap Text General Ea Copy Fill Paste B I U - D SF A Merge Merge & Center Center $ - % % 4:0 .00 Format Painter 8. Conditional Format Cell Insert Delete Format Sort & Find & Formatting as Table Styles 2 Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing QC1062 fax PS PT PU PV PW PX PY PZ Q A QB QC QD QE QE QG QH 1062 1063 REBECCA 1064 EBIT 44000 1065 TOTAL NO OF SHARES 8100 1066 PRICE 50 1067 VALUE OF THE FIRM = 8100 X 50 = 405000 1068 AS SHE OWNS = 17000/ 50 = 340 SHARES 1069 1070 CASH FLOW = 1846.91 [40000 X 340/8100] 1071 1072 TOTAL VALUE OF FIRM = 405000 1073 DEBT = 25% 101250 1074 EQUITY = 303750 1075 NO OF SHARES = 303750/50 6075 1076 1077 EBIT 44000 1078 INTEREST 7087.5 (101250 X 7%] 1079 EARNINGS FOR SHAREHOLDERS 36912.5 1080 1081 CASHFLOW 2065.88 [36912.50 X 340/6075] 1082 HO N KE CAPM UTILITY, SHARPE, beta convexity DGM betaport future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR right clean YIELD bond portfolio cap stru WACC RESI el Rea ferences: CF670 BOJ 120% DO 90 * 4 OENG 31-10-2019

- 2x Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select QE QE QG QH ke - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins * Cut Calibri -11AA = = = Dr Wrap Text General E Copy Paste Format Painter B I U - D A Merge & Center $ - % 8. Formatting as Table Styles Clipboard Font Alignment Number Styles Cells QB1100 fax _ PS PT PU PV PW PX PY PZ Q A QB QC QD 1082 1083 when company issues 25% debt 1084 She will sell 25% of her shares & lend same at 7.0% interest 1085 SHARES SOLD = 340 x 25% = 85 1086 remaining shares = 255 1087 so sale value of shares = 85 x 50 = 4250 1088 INTEREST INCOME AT 7.0% 297.5 [4250 X 7%] 1089 1090 1091 EBIT 44000 INTEREST 7087.5 [101250 x 7%] 1093 EARNINGS FOR SHAREHOLDERS 36912.5 1092 1094 CASHFLOW (dividend) CASHFLOW (interest) CASHFLOW 1549.41 [36912.50 X 255/6075] 297.50 [4250 X 7%] 1846.91 1095 1096 1097 1098 1099 1100 1101 1102 HO N Rea L convexity DGM betaport future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR right clean YIELD bond portfolio KE CAPM UTILITY, SHARPE, beta ferences: CF135 cap stru WACC BO 120% RESI el - x B 9 "All m * OENG e 31-10-2019