Selected financial information for Union Aerospace Corporation (UAC) is provided in the table. UAC is currently all equity financed, but it is considering a leveraged capital structure, details of which are presented in the Proposed column. Assume that UAC generates perpetual annual EBIT. Assume that all cash flows occur at the end of the year and we are currently at the beginning of a year. The company isnt growing so there are no investments in working capital or fixed assets. Assume that taxes are zero and that all of net income is paid out as a dividend. Assume that the debt is perpetual with annual coupons at the rate kD. Flynn Taggart is a shareholder in UAC. He owns 20,000 shares. Answer the questions that follow.

Capital Structure

	current	propose
EBIT	$100,000	$100,000
Debt, D	$0	$285,720
Cost of Debt, kD	N/A	5%
Shares Outstanding	100,000
Stock price	$14.286

Part 1

Under the current capital structure, how much does Flynn receive in dividends at the end of each year?

Responses

a. $40,000 b. $30,000 c. $20,000 d.$10,000