FCOJ, Inc., a prominent consumer products firm, is debating whether or not to co
ID: 2720287 • Letter: F
Question
FCOJ, Inc., a prominent consumer products firm, is debating whether or not to convert its all-equity capital structure to one that is 40 percent debt. Currently, there are 5,500 shares outstanding and the price per share is $52. EBIT is expected to remain at $19,100 per year forever. The interest rate on new debt is 7 percent, and there are no taxes.
Melanie, a shareholder of the firm, owns 270 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 round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
What will Melanie’s cash flow be under the proposed capital structure of the firm? Assume that she keeps all 270 of her shares. (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Suppose FCOJ does convert, but Melanie prefers the current all-equity capital structure. Show how she could unlever her shares of stock to recreate the original capital structure.
FCOJ, Inc., a prominent consumer products firm, is debating whether or not to convert its all-equity capital structure to one that is 40 percent debt. Currently, there are 5,500 shares outstanding and the price per share is $52. EBIT is expected to remain at $19,100 per year forever. The interest rate on new debt is 7 percent, and there are no taxes.
Explanation / Answer
Existing Proposed Equity 286000 171600 Debt 0 114400 Total Capital 286000 286000 No of Shares 5500 3300 Particulars Existing Proposed EBIT 19100 19100 Less: Interest: 7% 0 8008 EBT 19100 11092 Less: Tax 0 0 Earning available for equity Share holder 19100 11092 Dividend Payout 100% 19100 11092 No of Shares 5500 3300 Dividend Per Share 3.47 3.36 Particulars Existing Proposed Dividend Per Share 3.47 3.36 No of Shares 270 270 Cash Flow 936.90 907.20 Break Even 3.47= 907.20/No of Shares No of Shares = 907.20/3.47 261.4409 No of Shares = 262 Hence she should sell 270-262= 8 Share
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