Lemansky Enterprises is considering a change from its current capital structure. The company currently has an all-equity capital structure and is considering a capital structure with 35 percent debt. There are currently 5,000 shares outstanding at a price per share of $50. EBIT is expected to remain constant at $29,680. The interest rate on new debt is 11 percent and there are no taxes. a. Rebecca owns $10,000 worth of stock in the company. If the firm has a 100 percent payout, what is her cash flow? Note: Do not round intermediate calculations and round your answer to 2 decimal places, 32.16. b. What would her cash flow be under the new capital structure assuming that she keeps all of her shares? Note: Do not round intermediate calculations and round your answer to 2 decimal places, 32.16. c. Suppose the company does convert to the new capital structure. Show how Rebecca can maintain her current cash flow. Note: Do not round intermediate calculations and round your answer to the nearest whole number, 32.

Lemansky Enterprises is considering a change from its current capital structure. The company currently has an all-equity capital structure and is considering a capital structure with 35 percent debt. There are currently 5,000 shares outstanding at a price per share of $50. EBIT is expected to remain constant at $29,680. The interest rate on new debt is 11 percent and there are no taxes. a. Rebecca owns $10,000 worth of stock in the company. If the firm has a 100 percent payout, what is her cash flow? Note: Do not round intermediate calculations and round your answer to 2 decimal places, 32.16. b. What would her cash flow be under the new capital structure assuming that she keeps all of her shares? Note: Do not round intermediate calculations and round your answer to 2 decimal places, 32.16. c. Suppose the company does convert to the new capital structure. Show how Rebecca can maintain her current cash flow. Note: Do not round intermediate calculations and round your answer to the nearest whole number, 32.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Supercool Inc is currently an unlevered firm with 1,000 outstanding shares. It expects togenerate $1,600 in EBIT in perpetuity. The tax rate is 35%. All earnings after tax are paid outas dividends. The firm is considering a capital restructuring for which the company will issue$3,000 of debt to buy back shares. Its cost of debt is 10%. Unlevered firms in the sameindustry have a cost of equity of 20%. The capital restructuring is going to take place onemonth after its announcement. What is the share price of Supercool on the day before andafter the restructuring completion?
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Please help me with this question
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There are two firms: Firm U and Firm L. Both firms have $30,000 total assets and $5,000 EBIT (earnings before interest and taxes). Firm U is an unlevered firm without debt, and its number of outstanding shares is 1,000. Firm L is a levered firm financed with 50% debt and 50% common equity. The firm plans to use the debt to repurchase 50% of the outstanding shares (Note: reduce the outstanding shares). The pre-tax cost of debt for Firm L is 10%. Both firms have a 20% corporate tax rate. Calculate the earnings per share (EPS) for the unlevered firm U. A)$3.5 per share B)$5.0 per share C)$4.0 per share D)$5.6 per share

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