Question
In: Finance
Consider Dronalution, Inc. a major drone manufacturer is currently all equity financed. They are contemplating converting...
Consider
Dronalution, Inc. a major drone manufacturer is currently all equity financed. They are contemplating converting all equity capital structure to one that is 30% debt, financed at 6% interest. The company currently has 5,000 shares outstanding at a price of $53 per share. EBIT is $35,000 and expected to remain at this amount. Respond to the following. Ignore taxes.
Discuss
- Mr. Fisher one of the firm's shareholders, owns 200 shares of the firm's stock. What is his cash flow under the current capital structure? Assume a dividend payout rate of 100 percent.
- What will Mr. Fisher's cash flow be under the proposed capital structure of the firm? Assume that he keeps all of his shares.
- If Dronalution does convert, but Mr. Fisher prefers the all-equity capital structure. How could he unlever his shares of stock to recreate the original capital structure?
- Explain the concept of homemade leverage and why Dronalution's choice of capital structure is irrelevant.
Solutions
Expert Solution
SEE THE IMAGE. ANY DOUBTS,
FEEL FREE TO ASK. THUMBS UP PLEASE
jeff jeffy answered 1 year agoRelated Solutions
Consider Dronalution, Inc. a major drone manufacturer is currently all equity financed. They are contemplating converting...
Consider
Dronalution, Inc. a
major drone manufacturer is currently all equity financed. They are
contemplating converting all equity capital structure to one that
is 30% debt, financed at 6% interest. The company currently has
5,000 shares outstanding at a price of $53 per share. EBIT is
$35,000 and expected to remain at this amount. Respond to the
following. Ignore taxes.
Discuss
Mr. Fisher one of the firm's shareholders, owns 200 shares of
the firm's stock. What is his cash flow...
Dronalution, Inc. a major drone manufacturer is currently all equity financed. They are contemplating converting all...
Dronalution, Inc. a major drone manufacturer is currently all
equity financed. They are contemplating converting all equity
capital structure to one that is 30% debt, financed at 6% interest.
The company currently has 5,000 shares outstanding at a price of
$53 per share. EBIT is $35,000 and expected to remain at this
amount. Respond to the following. Ignore taxes. Discuss Mr. Fisher
one of the firm's shareholders, owns 200 shares of the firm's
stock. What is his cash flow under...
Windsor, Inc. is currently an all-equity financed firm, and its cost of equity is 12%. It...
Windsor, Inc. is currently an all-equity financed firm, and its
cost of equity is 12%. It has 20,000 shares outstanding that sell
for $25 each. The firm contemplates a restructuring that would
borrow $100,000 in perpetual debt at an interest rate of 8% which
will be used to repurchase stock. Assume that the corporate tax
rate is 35%.
(1) Calculate the present value of the interest tax shields and
the value of the firm after the proposed restructuring.
(2) What...
Question #3. Windsor, Inc. is currently an all-equity financed firm, and its cost of equity is...
Question #3.
Windsor, Inc. is currently an all-equity financed firm, and its
cost of equity is 12%. It has 20,000 shares outstanding that sell
for $25 each. The firm contemplates a restructuring that would
borrow $100,000 in perpetual debt at an interest rate of 8% which
will be used to repurchase stock. Assume that the corporate tax
rate is 35%.
(1) Calculate the present value of the interest tax shields and
the value of the firm after the proposed restructuring....
Windsor, Inc. is currently an all-equity financed firm, and its cost of equity is 12%. It has...
Windsor, Inc. is currently an all-equity financed firm, and its
cost of equity is 12%. It has 20,000 shares outstanding
that sell for $25 each. The firm contemplates a restructuring that
would borrow $100,000 in perpetual debt at an interest rate of 8%
which will be used to repurchase stock. Assume that the corporate
tax rate is 35%.
(1) Calculate the present value of the interest tax shields and
the value of the firm after the proposed restructuring.
(2) What will...
You have been provided the following information on BMS Inc, an all-equity financed manufacturer of building...
You have been provided the following information on BMS Inc, an
all-equity financed manufacturer of building materials.
In the most recent year, which was a bad one, the company made
only €40 million in net income. It expects next year to be normal.
The book value of equity of the company is €1 billion, and it
expects next year a Return on Equity of 10%.
The company expects to make €80 million in new capital
expenditures next year. It expects...
You have been provided the following information on BMS Inc, an all-equity financed manufacturer of building...
You have been provided the following information on BMS Inc, an
all-equity financed manufacturer of building materials.
In the most recent year, which was a bad one, the company made
only €40 million in net income. It expects next year to be normal.
The book value of equity of the company is €1 billion, and it
expects next year a Return on Equity of 10%.
The company expects to make €80 million in new capital
expenditures next year. It expects...
Consider Sky Fly, Inc is a fast growing drone manufacturer. The annual rate of return of...
Consider
Sky Fly, Inc is a
fast growing drone manufacturer. The annual rate of return of Sky
Fly's stock has been 20% over the past few years. Company managers
believe 20% is a good estimate for the firms' cost of capital. Sky
Fly's CEO, Dane Cooper, believes the company needs to continue to
invest in projects that offer the highest possible returns.
Currently, the company is reviewing two separate projects. Project
E involves expanding production capacity. Project I involves
introducing...
MacKinnon Co. currently has EBIT of $35,000 and is all equity financed. EBIT is expected to...
MacKinnon Co. currently has EBIT of $35,000 and is all equity
financed. EBIT is expected to stay at this level indefinitely. The
firm pays corporate taxes equal to 20% of taxable income. The cost
of equity for this firm is 18%.
Suppose the firm has a value of $155,555.56 when it is all
equity financed. Now assume the firm issues $71,000 of debt paying
interest of 8% per year and uses the proceeds to retire equity. The
debt is expected...
Lansing Inc., a profitable food products manufacturer, has undertaken a major expansion that will be financed...
Lansing Inc., a profitable food products manufacturer, has
undertaken a major expansion that will be financed by new debt and
equity issues as well as earnings. During the last year the company
borrowed $5 million for a term of 30 years to finance a new
building to house the expanded operations. It also sold 57000
shares of $4 par value stock at $55 per share to pay for new
equipment. It also paid off short-term loans that support inventory
and...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Profit margins and turnover ratios vary from one industry to another. What differences would you expect...
- You are given the main class RecursiveMethods.java which invokes methods that can be selected from a...
- Question a. Nisha Patel has a full time job as a nurse in her local hospital....
- This week as we continue our discussion on health promotion we will begin to look at...
- If companies have both a BCP and a DRP in place do they need to have...
- DESCRIBE WHAT THE FOLLOWING JAVA CODE DOES: public class Main{ public static void main(String[] args) {...
- Pete's Power Pizzas sells a chocolate/tofu filled pastry. Pete's currently sells this pastry for $13.15, and...
ADVERTISEMENT