Iceberg Corporation currently has an all-equity capital structure. The company is considering a new structure that holds 30% debt. There are 6,500 shares outstanding and the price per share is $45 today. EBIT is expected to remain at $29,000 per year forever. The interest rate on new debt is 8%, and there are no taxes.RequiredJustin, a shareholder of the firm, owns 100 shares of stock. What is his cash flow under the current capital structure, assuming the company has a dividend payout rate of 100%?What will Justin’s cash flow be under the proposed capital structure of the firm? Assume he keeps all 100 of his shares.Suppose the company does convert, but Justin prefers the current all-equity capital structure. Show how he could unlever his shares of stock to recreate the original capital structure.

1. Justin's Cash Flow Under the Current All-Equity Capital StructureSince the firm is all-equity,…

Answered: Iceberg Corporation currently has an…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter15: Dividend Policy

Section: Chapter Questions

Problem 4P

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Iceberg Corporation currently has an all-equity capital structure. The company is considering a new structure that holds 30% debt. There are 6,500 shares outstanding and the price per share is $45 today. EBIT is expected to remain at $29,000 per year forever. The interest rate on new debt is 8%, and there are no taxes.

Required

Justin, a shareholder of the firm, owns 100 shares of stock. What is his cash flow under the current capital structure, assuming the company has a dividend payout rate of 100%?
What will Justin’s cash flow be under the proposed capital structure of the firm? Assume he keeps all 100 of his shares.
Suppose the company does convert, but Justin prefers the current all-equity capital structure. Show how he could unlever his shares of stock to recreate the original capital structure.

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