Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Finch, Incorporated, is debating whether or not to convert its all - equity capital structure to one that is 2 0 percent debt. Currently, there

Finch, Incorporated, is debating whether or not to convert its all-equity capital structure to one that is 20 percent debt. Currently, there are 6,000 shares outstanding and the price per share is $40. EBIT is expected to remain at $12,000 per year forever. The interest rate on new debt is 7 percent, and there are no taxes.
a. Allison, a shareholder of the firm, owns 100 shares of stock. What is her cash flow under the current capital structure, assuming the firm has a dividend payout rate of 100 percent?
Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g.,32.16.
b. What will Allison's cash flow be under the proposed capital structure of the firm? Assume she keeps all 100 of her shares.
Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g.,32.16.
c. Assume that Allison unlevers her shares and re-creates the original capital structure. What is her cash flow now?
Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g.,32.16.
\table[[a. Cash flow],[b. Cash flow],[c. Cash flow]]
image text in transcribed

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Fundamentals Of Financial Management

Authors: James C. Van Horne

10th Edition

0138596875, 9780138596873

More Books

Students also viewed these Finance questions