What is cash flow under the current capital structure

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FCOJ, Inc., a prominent consumer products firm, is debating whether or not to convert its all-equity capital structure to one that is 35 percent debt. Currently there are 5,000 shares outstanding and the price per share is $49. EBIT is expected to remain at $43,600 per year forever. The interest rate on new debt is 7 percent and there are no taxes.

Problem 1: Ms. Brown, 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?

Problem 2: What will Ms. Brown's cash flow be under the proposed capital structure of the firm? Assume that she keeps all 100 of her shares.

Problem 3: Assume that Ms. Brown unlevers her shares and re-creates the original capital structure. What is her cash flow now?

Reference no: EM132877314

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