Beauport Inc, a prominent consumer products firm, is debating whether to convert its all equity capital structure to one that is 30% debt. Currently, there are 6500 shares outstanding and price per share is $45. EBIT is expected to remain at $29,000 per year forever. The interest rate on new debt is 8% and there are no taxes.

Suppose the company does convert but Frances prefers the current all equity capital structure. How will you propose for Frances to retain her original cash flow before the capital structure conversion?

a) Frances should sell 10% of her shares and lend the proceeds at 5%.

b) Frances should sell 70% of her shares and lend the proceeds at 40%.

c) Frances should sell 50% of her shares and lend the proceeds at 13%.

d) Frances should sell 30% of her shares and lend the proceeds at 8%.

C IS CORRECT