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 25 percent debt. Currently, there are 10,000 shares outstanding, and the price per share is $42. EBIT is expected to remain at $37,000 per year forever. The interest rate on new debt is 4.5 percent, and there are no taxes.

Allison, a shareholder of the firm, owns 300 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 25 percent debt. Currently, there are 10,000 shares outstanding, and the price per share is $42. EBIT is expected to remain at $37,000 per year forever. The interest rate on new debt is 4.5 percent, and there are no taxes.

Explanation / Answer

a) Cash flow = 37000 * 300 / 10000 = 1110

b) Cash flow = (37000 - (42*10000*.25*4.5%)) * 300 / 7500 = 1291

c) Cash flow = 1291*.75 + 300*.25*42*4.5% = 1110

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