Questionjcs cement company is discussion whether to convert

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JCS Cement Company is discussion whether to convert its leveraged capital structure that has a D/E = 2.3 to one that is all-equity. Currently there are 43290 shares unpaid and the share price is $7.00 which will continue the same under any capital structures structures (you can suppose that there can be fractions of a share). The EBIT is $800,000 per year forever. The interest rate on debt is 10.0%. There are no taxes. The dividend pay-out ratio is 100%.

a) Mr. Dimitry owns 1000 shares of equity. What is his cash flow in its current capital structure (leveraged D/E = 2.3)?

b) What will be his cash flow in the proposed capital structure (levered) if he keeps all his 1,000 shares?

c) Presume JCS Cement Company doesn't change its capital structure but Mr. Dimitry prefers the All-equity capital structure. Describe how he can unlever the shares he currently owns of the leveraged company as well as obtain the cash flow under the proposed All-equity capital structure. Show all calculations as well as explain what he needs to do

Reference no: EM13350463

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