Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever

Question

Dynamo Corp. produces annual cash flows  of $150 and is expected to exist forever. The company is currently financed  with 75 percent equity and 25 percent debt. Your analysis tells you that the  appropriate discount rates are 10 percent for the cash flows, and 7 percent  for the debt. You currently own 10 percent of the stock.

If Dynamo  wishes to change its capital structure from 75 percent to 60 percent equity  and use the debt proceeds to pay a special dividend to shareholders, how much  debt should they issue?

Explanation / Answer

225

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