The Jorgensen Corporation is debating whether to convert its current all-equity capital structure to one that is 40 percent debt. Currently; there are 100 shares outstanding and the price per share is $120. EBIT is expected to remain at $400 per year forever. The interest rate on the debt is 8 percent, and there are no taxes. Ms. Lyndi owns 10 shares.
a. What is Ms. Lyndi's cash flow under the current capital structure?
b. What will Ms. Lyndi's cash flow be under the proposed capital structure? Assume that she
retains all 10 shares.
c. Suppose Jorgensen does convert, but Ms. Lyndi prefers the current capital structure. Show how she could unlever her investment to re-create the original capital structure
d. Explain why the capital structure Jorgensen chooses is irrelevant.