Question

Star, Inc., a prominent consumer products firm, is debating whether or not to convert its all-equity capital structure to one that is 30 percent debt. Currently there are 14,000 shares outstanding and the price per share is $63. EBIT is expected to remain at $77,000 per year forever. The interest rate on new debt is / percent, and there are no taxes. a. Ms. Brown, a shareholder of the firm, owns 250 shares of stock. What is her cash flow apital 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.) Cash flow b. What will Ms. Brown's cash flow be under the proposed capital structure of the firm? Assume that she keeps all 250 of her shares. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Cash flow $ c. Assume that Ms. Brown 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.) Cash flow

Answer 1

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1 Ale $ W ? v . 1 03:02 ENG 16-02-202026 QA54 - X f x PW =QA52* (250/QA48) PX - - PU PV PV PZ QA QB QC QD QE QF QG QH - HOME MADE LEVERAGE EBIT TOTAL NO OF SHARES VALUE OF THE FIRM = 14000 X 63 = 77000 14000 882000 AS HE OWNS 250 SHARES CASH FLOW = 1375 77000* (250/14000) TOTAL VALUE OF FIRM = DEBT = 30% = 30% OF 882000 = EQUITY = NO OF SHARES = 617400/63 = 882000 264600 617400 9800 EBIT INTEREST EARNINGS FOR SHAREHOLDERS 77000 18522 (264600 X 7%) 58478 CASHFLOW 1491.79 58478*(250/9800) when company issues 30% debt Ms. Brown will sell 30% of her shares & lend same at 7% interest 250 x 30% = 75 shares will be sold remaining shares = 175 port future INDEX INTL CAP BUD SANDRINE LEASING PV, FV, ANNUITY 59 ... convexity DGM beta DIR right clean YIELD bond portfolio WACC Sheet 10 ...

? v . 1 03:03 ENG 16-02-202026 PW74 - V - PU X PV fix PW PX PV PZ QA QB Qc QD E QF QG QH a when company issues 30% debt Ms. Brown will sell 30% of her shares & lend same at 7% interest 250 x 30% = 75 shares will be sold remaining shares = 175 so sale value of shares = 75 X 63 = 4725 INTEREST INCOME AT 7% 330.75 (4725 X 7%) EBIT INTEREST EARNINGS FOR SHAREHOLDERS 77000 18522 (264600 X 7%) 58478 CASHFLOW (dividend) CASHFLOW (interest) 1044.25 58478* (175/9800) 330.75 (4725 X 7%) 1375 CASHFLOW 76 T ... CoNvexity DGM beta port future INDEX INTL CAP BUD SANDRINE LEASING PV, FV, ANNUITY DIR right clean YIELD bond portfolio WACC Sheet 10 ...