In: Finance
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 6,900 shares
outstanding and the price per share is $59. EBIT is expected to
remain at $26,220 per year forever. The interest rate on new debt
is 10 percent, and there are no taxes.
a. Melanie, a shareholder of the firm, owns 180
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 and round
your answer to 2 decimal places, e.g., 32.16.)
Shareholder cash flow
$
b. What will Melanie’s cash flow be under the
proposed capital structure of the firm? Assume that she keeps all
180 of her shares. (Do not round intermediate calculations
and round your answer to 2 decimal places, e.g.,
32.16.)
Shareholder cash flow
$
c. 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.
(Do not round intermediate calculations and round your
answer to the nearest whole number, e.g., 32.)
Number of shares stockholder should sell