FCOJ, Inc., a prominent consumer products firm, is debating whether or not to co
ID: 2762634 • 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 30 percent debt. Currently, there are 7,300 shares outstanding and the price per share is $61. EBIT is expected to remain at $22,484 per year forever. The interest rate on new debt is 6 percent, and there are no taxes.
Melanie, a shareholder of the firm, owns 200 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 200 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 30 percent debt. Currently, there are 7,300 shares outstanding and the price per share is $61. EBIT is expected to remain at $22,484 per year forever. The interest rate on new debt is 6 percent, and there are no taxes.
Explanation / Answer
Answer a
EBIT
22484
No of share
7300
EPS
3.08
Melanie's holding (no of shares)
200
Melanie's cashflow
616
Answer b
EBIT
22,484
Interest (7300*61)*30%*6%
8,015
EBT
14,469
No of share (7300-(7300*30%))
5,110
EPS
2.83
Melanie's holding (no of shares)
200
Melanie's cashflow
566
Answer C
Original EPS (1)
3.08
EBT in new capital structure (2)
14469
No of shares required (2)/(1)
4,698
Current no of shares
5,110
No of shares need to sell
412
Answer a
EBIT
22484
No of share
7300
EPS
3.08
Melanie's holding (no of shares)
200
Melanie's cashflow
616
Answer b
EBIT
22,484
Interest (7300*61)*30%*6%
8,015
EBT
14,469
No of share (7300-(7300*30%))
5,110
EPS
2.83
Melanie's holding (no of shares)
200
Melanie's cashflow
566
Answer C
Original EPS (1)
3.08
EBT in new capital structure (2)
14469
No of shares required (2)/(1)
4,698
Current no of shares
5,110
No of shares need to sell
412
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