Conspicuous Consumption, Inc., a prominent consumer products firm, is debating w

Question

Conspicuous Consumption, Inc., a prominent consumer products firm, is debating whether to convert its all-equity capital structure to one that is 44 percent debt. Currently, there are 2,100 shares outstanding and the price per share is $ 70. EBIT is expected to remain at $ 14,500 per year forever. The interest rate on new debt is 8 percent, and there are no taxes.

Ms. Brown, a shareholder of the firm, owns 100 shares of stock. Her cash flow is $ under the current capital structure, assuming the firm has a dividend payout rate of 100 percent. (Do not include the dollar sign ($). Round your answers to 2 decimal places. (e.g.,16.32))

Ms. Brown

Explanation / Answer

a) her cash flow under the current structure is 14500 * 100 / 2100 = 690.48

b)

Total market cap is 70 * 2100 = 147000 dollars of which 44% is debt = 64680

returns on debt is 64680 * 8/100 = 5174.40

returns on equity is 14500 - 5174.40 = 9325.60

this 9325.60 is to be divided among 2100 * 56 / 100 shares = 1176 shares

cash flow of brown is 9325.60 * 100 / 1176 = 792.99

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