McDonalds currently has 7,000 shares outstanding with a share price of $60. Earnings Before Interest and...

McDonalds currently has 7,000 shares outstanding with a share price of $60. Earnings Before Interest and Taxes is expected to remain at $38,600 per year in perpetuity. McDonalds is considering a change in its capital structure from all-equity to one that is 25 percent debt. The interest rate on new debt issues is 8 percent, and there are no taxes.

If the firm pays out all of its earnings as dividends what is your cash flow under the current structure if you currently own 125 shares?
What will your cash flow be under the proposed capital structure assuming that you keep all 125 shares.
If McDonalds does convert, but you prefer the current all-equity capital structure. Show how you could replicate your cash flow in the all-equity capital structure.
Using your answer to part (c), explain why the company’s choice of capital structure is irrelevant.

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jeff jeffy answered 1 year ago

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