FCOJ, Inc., a prominent consumer products firm, is debating whether or not to convert its...
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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 40 percent debt. Currently, there are 6,500 shares outstanding and the price per share is $57. EBIT is expected to remain at $22,750 per year forever. The interest rate on new debt is 6 percent, and there are no taxes. |
| Required: |
| (a) | Melanie, a shareholder of the firm, owns 130 shares of stock. What is her cash flow under the current capital structure, assuming the firm has a dividend payout rate of 100 percent?
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| b) | What will Melanies cash flow be under the proposed capital structure of the firm? Assume that she keeps all 130 of her shares. |
| Shareholder cash flow | $ ___ |
| (c) | Suppose FCOJ does convert, but Melanie prefers the current all-equity capital structure. Show how she could unlever her shares of stock to recreate the original capital structure. Number of shares stockholder should sell ____
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