Monkey Inc. is debating whether to convert its all-equity capital structure to one that is 40% debt. There are currently 300,000 shares outstanding and the price per share is $40. EBIT is expected to remain at $650,000 per year forever. The interest rate on new debt is 6% and it is a perfect capital market. Andi, a shareholder of the firm, has 3,000 shares. Suppose the firm converts but she prefers the current all-equity capital structure. What strategy would she use to achieve her desired cash flows?
Monkey Inc. is debating whether to convert its all-equity capital structure to one that is 40% debt. There are currently 300,000 shares outstanding and the price per share is $40. EBIT is expected to remain at $650,000 per year forever. The interest rate on new debt is 6% and it is a perfect capital market. Andi, a shareholder of the firm, has 3,000 shares. Suppose the firm converts but she prefers the current all-equity capital structure. What strategy would she use to achieve her desired cash flows?
A) Sell 1,200 shares of the firm and invest the proceeds of $36,000 at 6% interest.
B) Sell 1,200 shares of the firm and invest the proceeds of $48,000 at 6% interest.
C)Sell 1,800 shares of the firm and invest the proceeds of $36,000 at 6% interest.
D) Sell 1,800 shares of the firm and invest the proceeds of $48,000 at 6% interest.
E) None of the above.
Step by step
Solved in 3 steps with 2 images
