Staal Enterprises is considering a change from its current capital structure. St

Question

Staal Enterprises is considering a change from its current capital structure. Staal currently has an all-equity capital structure and is considering a capital structure with 40 percent debt. There are currently 4,350 shares outstanding at a price per share of $25. EBIT is expected to remain constant at $21,830. The interest rate on new debt is 6 percent and there are no taxes. Required: (a) Rebecca owns $29,000 worth of stock in the company. If the firm has a 100 percent payout, what is her cash flow?(Do not include the dollar sign ($). Round your answer to 2 decimal places (e.g., 32.16).) Shareholder cash flow $ (b) What would her cash flow be under the new capital structure assuming that she keeps all of her shares? (Do not include the dollar sign ($). Round your answer to 2 decimal places (e.g., 32.16).) Shareholder cash flow $ (c) Suppose the company does convert to the new capital structure. Show how Rebecca can maintain her current cash flow. Number of shares stockholder should sell

Explanation / Answer

After change in capital structure

Equity= 65250

Debt=43500

Interest to be paid on this debt = 43500 * 0.6 = 2610

EBIT = 21830

CAsh remaining to be distributed to share holders = 21830-2610=19220

This remaining cash is distributed among the share holders in proportion to their shares

a) Therefore cash flow for Rebecca is 21830/4350*1160=5821.33

b) Therefore cash flow for Rebecca is 19220/2610*1160=8542.22 under the new capital structure

c) (1160+x)/4350*21830=8542.222, where x is the number of shares rebecca should buy to maintain her current cash flow. Hence x= 542.18

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