FCOJ, Inc., a prominent consumer products firm, is debating whether or not to convert its all-equity capital structure to one that is 30% debt. Currently, there are 5000 shares outstanding and the price per share is $40. EBIT is expected to remain at $20000 per year forever. The interest rate on new debt is 5%, and there are no taxes.

AMelanie, a shareholder of the firm, owns 100 shares. What is her cash flow under the current capital structure, assuming the firm has a dividend payout rate of 100%

BWhat will Melanies cash flow be under the proposed capital structure of the firm? Assume that she keeps all 100 shares.

CSuppose FCOJ does convert, but Melanie prefers the current all-equity capital structure. Show how she could unlever her shares of stock to recreate the original capital structure.

Neal Enterprises has no debt, its equity has a required return of 12%. The current value of the company is $45 million. Tax rate is 40%.

Neal is considering a capital restructuring, it will issue $16 million to buyback outstanding shares. Suppose the company can borrow at 7%. What will be the firm value, cost of equity and WACC after the capital restructuring?