Part 1   Under the current (leveraged) capital structure, how much does Lando receive in dividends at the end of each year? Responses $10,786 $12,786 $9,304 $11,786 Question 2 Part 2   Under the proposed capital structure, BGMC will issue equity to repay all of the debt. How many shares will be outstanding after the new issue if BGMC sells shares for $10.00 each? Responses 97,857 70,000 102,857 112,857 Question 3 Part 3   Assume that Lando continues to hold his shares throughout the new issue. (He does not buy any more shares.) Under the all-equity capital structure, how much does Lando receive in dividends at the end of each year? Responses $12,786 $10,786 $9,304 $11,786

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
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Selected financial information for the Bespin Gas Mining Corporation (BGMC) is provided in the table. BGMC is currently leveraged, but it is considering a new issue of equity which would be used to repay all of its debt. Financial details are presented in the Proposed column. Assume that BGMC generates perpetual annual EBIT. Assume that all cash flows occur at the end of the year and we are currently at the beginning of a year. The company isn’t growing so there are no investments in working capital or fixed assets. Assume that taxes are zero and that all of net income is paid out as a dividend. Assume that the debt is perpetual with annual coupons at the rate kD. Lando Calrissian is a shareholder in BGMC. He owns 10,500 shares. Answer the questions that follow.

  Capital Structure
  Current Proposed
EBIT $100,000 $100,000
Debt, D $428,570 $0
Cost of Debt, kD 5% N/A
Shares Outstanding 70,000  
Stock Price $10.00  

 

Part 1

 

Under the current (leveraged) capital structure, how much does Lando receive in dividends at the end of each year?

Responses

$10,786

$12,786

$9,304

$11,786

Question 2

Part 2

 

Under the proposed capital structure, BGMC will issue equity to repay all of the debt. How many shares will be outstanding after the new issue if BGMC sells shares for $10.00 each?

Responses

97,857

70,000

102,857

112,857

Question 3

Part 3

 

Assume that Lando continues to hold his shares throughout the new issue. (He does not buy any more shares.) Under the all-equity capital structure, how much does Lando receive in dividends at the end of each year?

Responses

$12,786

$10,786

$9,304

$11,786

Question 4

Part 4

 

Assume that BGMC implements the new (all-equity) capital structure. Lando continues to hold his shares throughout the new issue. (He does not buy any more.) After the new issue, Lando is unhappy with his dividends. How many shares does Lando have to buy in order to return his annual cash flows to the level he enjoyed when the company was leveraged? (Assume that Lando can borrow at the same rate as BGMC.)

Responses

8,999

9,429

7,999

6,429

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