Dickson Company and Samson Inc. are identical firms in all aspects except for their capital structure. Dickson is all equity financed with $3,200,000 in stock. Samson uses both perpetual debts and stock. There are 1,200 units of perpetual debts outstanding, paying 5% coupon annually and the market required yield on its debts is 5%. Par value of the debts is $1,000. Both firms expect EBIT to be $380,000 per year forever. Both firms have a 100% dividend payout rate. Assume no taxes.

1. (a) Bonnie owns $120,000 worth of Dicksons stock. Compute her cash flow from dividend under the current capital structure.

2. (b) Compute the current market value of Samsons perpetual debts, and determine the debt to equity ratio of Samson. Assume MM proposition I is valid.

3. (c) Bonnie holds the view that if she invests in Samson she cannot generate the same cash flows she prefers from Dickson. Critically evaluate if this is true by referring to the relevant strategy. Prove your argument by showing in detail the steps and computation involved.

(d) John owns $120,000 worth of Samsons stock. Compute his cash flow from dividend under the current capital structure.

(e) John thinks that if he invests in Dickson he cannot generate the same cash flows he would get from Samson. Critically evaluate if this is true by referring to the relevant strategy. Prove your argument by showing in detail the steps and computation involved.