Pagemaster Enterprises is considering a change from its current capital structure. The company currently has an...

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Pagemaster Enterprises is considering a change from its currentcapital structure. The company currently has an all-equity capitalstructure and is considering a capital structure with 45 percentdebt. There are currently 2,000 shares outstanding at a price pershare of $50. EBIT is expected to remain constant at $21,996. Theinterest rate on new debt is 6 percent and there are no taxes.
a. Rebecca owns $20,000 worth of stock in the company. If thefirm has a 100 percent payout, what is her cash flow? (Do not roundintermediate calculations and round your answer to 2 decimalplaces, 32.16.)
b. What would her cash flow be under the new capital structureassuming that she keeps all of her shares? (Do not roundintermediate calculations and round your answer to 2 decimalplaces, 32.16.)
c. Suppose the company does convert to the new capitalstructure. Show how Rebecca can maintain her current cash flow. (Donot round intermediate calculations and round your answer to 2decimal places, 32.16.)

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4.5 Ratings (952 Votes)

a Companys Value No of shares outstanding x Share Price 2000 x 50 100000 Rebeccas Cash Flow Share Value owned Value of Company x EBIT 20000 100000 See Answer

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Pagemaster Enterprises is considering a change from its currentcapital structure. The company currently has an all-equity capitalstructure and is considering a capital structure with 45 percentdebt. There are currently 2,000 shares outstanding at a price pershare of $50. EBIT is expected to remain constant at $21,996. Theinterest rate on new debt is 6 percent and there are no taxes.a. Rebecca owns $20,000 worth of stock in the company. If thefirm has a 100 percent payout, what is her cash flow? (Do not roundintermediate calculations and round your answer to 2 decimalplaces, 32.16.)b. What would her cash flow be under the new capital structureassuming that she keeps all of her shares? (Do not roundintermediate calculations and round your answer to 2 decimalplaces, 32.16.)c. Suppose the company does convert to the new capitalstructure. Show how Rebecca can maintain her current cash flow. (Donot round intermediate calculations and round your answer to 2decimal places, 32.16.)