Mudpack, Inc., a prominent consumer products firm, is debating whether to conver

Question

Mudpack, Inc., a prominent consumer products firm, is debating whether 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 $60. EBIT is expected to remain at $23,400 per year forever. The interest rate on new debt is 5 percent, and there are no taxes.

Allison, a shareholder of the firm, owns 150 shares of stock. What is her cash flow under the current capital structure, assuming the firm has a dividend payout rate of 100 percent? (Round your answer to 2 decimal places. (e.g., 32.16))

What will Allison

Mudpack, Inc., a prominent consumer products firm, is debating whether 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 $60. EBIT is expected to remain at $23,400 per year forever. The interest rate on new debt is 5 percent, and there are no taxes.

Explanation / Answer

a. Allison, a shareholder of the firm, owns 150 shares of stock. What is her cash flow under the current capital structure, assuming the firm has a dividend payout rate of 100 percent? (Round your answer to 2 decimal places. (e.g., 32.16))

The earnings per share are:

         EPS = Net Income/Outstanding Share

         EPS = 23,400/6,000

         EPS = $3.90

         So, the cash flow for the company is:

         Cash flow = EPS*No of Share hold by company

         Cash flow = 3.90*150 shares

         Cash flow = $585

b.    What will Allison

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.