FCOJ, Inc., a prominent consumer products firm, is debating whether or not to co
ID: 2769340 • 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 35 percent debt. Currently, there are 5,300 shares outstanding and the price per share is $50. EBIT is expected to remain at $17,800 per year forever. The interest rate on new debt is 6 percent, and there are no taxes.
Melanie, a shareholder of the firm, owns 240 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 240 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 35 percent debt. Currently, there are 5,300 shares outstanding and the price per share is $50. EBIT is expected to remain at $17,800 per year forever. The interest rate on new debt is 6 percent, and there are no taxes.
Explanation / Answer
EXPLANATION:
Here two capital structures in first one total capital is equity capitl but in second one 35% debt @6% and remaing is equity. Cash flow in two capital structure planes of the investor Melanie's is caluclated under the single table as follows. the values how arrived was shown in table
This is the answer for first two Parts.
Explanation for part three:
To unlever her shares of stock 35% of the shares she has should sell and invest them @6% to get interest . and rest of the shares are kept as equity shares.
no of shares to sell = 35%*240 = 84
amount earned on sell = 84*50 =4200
interest on 4200@6% = $252
dividend on remaining (240-84) 156 shares in new plan =156*3.55 =$554
total cash flow [252+554] is $806 is equal to as cash flow in original capital structure.
S.no Capital Structure-1 S.no Capital Structure-2 1 Interest Rate 0 1 Interest Rate 6% 2 No of shares 5300 2 No of shares [4/3] 3445 3 Share price $50 3 Share price 50 4 Equity [100%] $2,65,000 4 Equity [65%*$2,65,000] $1,72,250 5 Debt [0%] 5 Debt [35%*$2,65,000] $92,750 6 Tota capital $2,65,000 6 Tota capital $2,65,000 7 EBIT $17,800 7 EBIT $17,800 8 Less: Interest 0 8 Less: Interest $5,565 9 EBT [7-8] $17,800 9 EBT [7-8] $12,235 10 Less: Tax 0 10 Less: Tax 0 11 PAT [9-10] $17,800 11 PAT [9-10] $12,235 12 No of Shares 5300 12 No of Shares 3445 13 EPS [11/12] 3.36 13 EPS [11/12] 3.55 14 Cash flow in Capital Structure-1 14 Cash flow in Capital Structure-2 15 Holding shares $240 15 Holding shares $240 16 share price $50 16 share price $50 17 cash out flow $12,000 17 cash out flow $12,000 18 Cash inflow $806 18 Cash inflow $852Related Questions
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