Star, Inc., a prominent consumer products firm, is debating whether or not to convert its all-equity capital structure to one that is 40 percent debt. Currently there are 10,000 shares outstanding and the price per share is $60. EBIT is expected to remain at $60,000 per year forever. The interest rate on new debt is 8 percent, and there are no taxes.

A: Ms. Brown, a shareholder of the firm, owns 200 shares of stock. What is her cash flow under the current capital structure, assuming the firm has a dividend payout rate of 100 percent?

B: What will Ms. Brown's cash flow be under the proposed capital structure of the firm? Assume that she keeps all 200 of her shares.

C: Suppose the company does convert, but Ms. Brown prefers the current all-equity capital structure. Show how she could unlever her stocks to recreate the original capital structure.