2. Conspicuous Consumption Ine, a prominent consumer products firm is debating Whether or not to convert its all-equity capital structure to one that is 35 percent debt. Currently. there are 8,000 shares outstanding and the prise per share is $70. EBIT is expected to remain at $30,000 per year forever, the interest rate on new debt is 8 percent and there are no taxes. A. Ms.Brown,a shareholder of the firm .owns 100shares of stock .what is her cashi flow under the current capital structure, assuming the firm has a dividend payout rate of 100 percent? B. What will Ms. Brown's cash flow be under the proposed capital structure of the firm? Assume that she keeps all 100 of her shares. C. Suppose the company does convert, but MS Brown prefers the current all-equity capital structure. Show how she could unlever her shares of stock to Recreate the original capital structure. D. Using your answer to part (C) explain why the company's choice of capital

Essentials Of Investments
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Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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2. Conspicuous Consumption Ine, a prominent consumer products firm is debating
Whether or not to convert its all-equity capital structure to one that is 35 percent
debt. Currently. there are 8,000 shares outstanding and the prise per share is $70.
EBIT is expected to remain at $30,000 per year forever, the interest rate on new debt
is 8 percent and there are no taxes.
A. Ms. Brown,a shareholder of the firm .owns 100shares of stock .what is her cashi
flow under the current capital structure, assuming the firm has a dividend payout
rate of 100 percent?
B. What will Ms. Brown's cash flow be under the proposed capital structure of the
firm? Assume that she keeps all 100 of her shares.
C. Suppose the company does convert, but MS Brown prefers the current
all-equity capital structure. Show how she could unlever her shares of stock to
Recreate the original capital structure.
D. Using your answer to part (C) explain why the company's choice of capital
Structure is irrelevant.
Transcribed Image Text:2. Conspicuous Consumption Ine, a prominent consumer products firm is debating Whether or not to convert its all-equity capital structure to one that is 35 percent debt. Currently. there are 8,000 shares outstanding and the prise per share is $70. EBIT is expected to remain at $30,000 per year forever, the interest rate on new debt is 8 percent and there are no taxes. A. Ms. Brown,a shareholder of the firm .owns 100shares of stock .what is her cashi flow under the current capital structure, assuming the firm has a dividend payout rate of 100 percent? B. What will Ms. Brown's cash flow be under the proposed capital structure of the firm? Assume that she keeps all 100 of her shares. C. Suppose the company does convert, but MS Brown prefers the current all-equity capital structure. Show how she could unlever her shares of stock to Recreate the original capital structure. D. Using your answer to part (C) explain why the company's choice of capital Structure is irrelevant.
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