Question
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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 2 years 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...
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will be used to repurchase stock. Assume that the corporate tax
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that sell for $25 each. The firm contemplates a restructuring that
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which will be used to repurchase stock. Assume that the corporate
tax rate is 35%.
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