Mudpack, Inc., a prominent consumer products firm, is debating whether to conver
ID: 2382675 • Letter: M
Question
Mudpack, Inc., a prominent consumer products firm, is debating whether to convert its all-equity capital structure to one that is 20 percent debt. Currently, there are 16,000 shares outstanding, and the price per share is $83. EBIT is expected to remain at $86,400 per year forever. The interest rate on new debt is 6 percent, and there are no taxes.
Mudpack, Inc., a prominent consumer products firm, is debating whether to convert its all-equity capital structure to one that is 20 percent debt. Currently, there are 16,000 shares outstanding, and the price per share is $83. EBIT is expected to remain at $86,400 per year forever. The interest rate on new debt is 6 percent, and there are no taxes. 144 a. Allison, a shareholder of the firm, owns 300 shares of stock. What is her cash flow under the current capital structure, assuming the firm has a dividend payout rate of 100 percent? (Round your answer to 2 decimal places. (e.g., 32.16)) Cash flow b. What will Allison's cash flow be under the proposed capital structure of the firm? Assume she keeps all 300 of her shares. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Cash flow c. Assume that Allison unlevers her shares and re-creates the original capital structure. What is her cash flow now? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Total Cash flowExplanation / Answer
Solution-a
The earnings per share are:
EPS = $86,400 / 16,000 Shares
EPS = $5.4
Cash flow of the company as follow.....
Cash flow = $5.4 (300 shares)
Cash flow = $1,620
Solution-b
The market value of the firm is:
V = $83(16,000)
V = $1,328,000
The firm will raise new debt in the amount of:
D = 0.20($1,328,000)
D = $265,600
Number of shares repurchased will be as follow....
Shares repurchased = $265,600 / $83
Shares repurchased =3,200
Net income with the interest payment as follow....
NI = $86,400 – .06($265,600)
NI = $70,464
EPS under the new capital structure as follow....
EPS = $70,464 /12,800 shares
EPS = $5.50
All earning paid as the dividend , So cash flow as follow....
Shareholder cash flow = $5.50 (300 shares)
Shareholder cash flow = $1,650
Solution-c
For replicate the proposed capital structure, the shareholder should sell 20 percent of their shares, or 60 shares, The shareholder will have an interest cash flow as follow...
Interest cash flow = 60($83)(.06)
Interest cash flow = $299
Dividend received on remaining 240 Shares as follows.......
Dividends received = $5.50 (240 shares)
Dividends received = $1,320
Total cash flow as folow.....
Total cash flow = $299 + $1,320
Total cash flow = $1,619 (Approx)
This is the same cash flow we calculated in part a.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.