Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever

Question

Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock.

If Dynamo wishes to change its capital structure from 75 percent to 60 percent equity and use the debt proceeds to pay a special dividend to shareholders, How much debt should they issue?

Explanation / Answer

Answer is $375

previously i did calculation mistake

cash flow worth =150/0.1 =1500

for debt = 1500*(1-3/4)

=$375

they must issue $375 as debt

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