Finch, Incorporated, is debating whether or not to convert its all-equity capital structure to one that is 20 percent debt. Currently, there
are 6,000 shares outstanding and the price per share is $40. EBIT is expected to remain at $12,000 per year forever. The interest rate
on new debt is 7 percent, and there are no taxes.
a. Allison, a shareholder of the firm, owns 100 shares of stock. What is her cash flow under the current capital structure, assuming the
firm has a dividend payout rate of 100 percent?
Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.
b. What will Allison's cash flow be under the proposed capital structure of the firm? Assume she keeps all 100 of her shares.
Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.
c. Assume that Allison unlevers her shares and re-creates the original capital structure. What is her cash flow now?
Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.
a. Cash flow
b. Cash flow
c. Cash flow