FCOJ, Inc., a prominent consumer products firm, is debating whether or not to co

Question

FCOJ, 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 6,100 shares outstanding and the price per share is $55. EBIT is expected to remain at $19,500 per year forever. The interest rate on new debt is 8 percent, and there are no taxes.

Melanie, a shareholder of the firm, owns 100 shares of stock. What is her cash flow under the current capital structure, assuming the firm has a dividend payout rate of 100 percent? (Do not include the dollar sign ($). Round your answer to 2 decimal places (e.g., 32.16).)

What will Melanie

FCOJ, 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 6,100 shares outstanding and the price per share is $55. EBIT is expected to remain at $19,500 per year forever. The interest rate on new debt is 8 percent, and there are no taxes.

Explanation / Answer

a)     Earnings per share = EBIT/ No of shares = 19500/6100 = 3.19672

Cash flow = 100*3.19672 = $319.672 answer

b)     Value of the company = 6100*35 = $335500

Debt = 30% * 335500 = 100650

EBIT = 19500

Less-interest 100650*8% = 8052

EAT = 11448

Cash flow = 11448/6100*100 = $187.67 answer

c)     She can repay the debt by raising same amount of money through equity shares at current prevailing market price of $55

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

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