XYZ's Barbecue Inc. operates a chain of restaurants in the south eastern United States. XYZ's is currently levered. It used to be all-equity, but it recently borrowed and used the money to repurchase 30,000 shares. Financial details for the current and old capital structures are presented in the table below. Assume that XYZ's generates perpetual annual EBIT at a constant level. Assume that all cash flows occur at the end of the year and we are currently at the beginning of a year. Assume that taxes are zero. Assume that all of net income is paid out as a dividend. Assume that the debt is perpetual with annual coupons at 6%. Assume that individual investors can borrow and lend at the same interest rate (and with the same terms) as corporations. Juan Allman is a shareholder in XYZ's who owns 30,000 shares. After the repurchase, Juan is unhappy with his dividends. How many shares does Juan have to buy (sell) in order to return his annual cash flows to what they were under the all-equity capital structure? (Assume that Juan had the same number of shares under the old structure.) Capital Structure Capital Structure Old (All-Equity) Current (Levered) EBIT $120,000 $120,000 Debt, D $0 $450,000 Cost of Debt, N/A 6% Shares Outstanding 100,000 70,000 Stock Price $15.00 $15.00 Dividends per share $1.20 $1.3286 (Indicate in your answer if it is sell or buy)
XYZ's Barbecue Inc. operates a chain of restaurants in the south eastern United States. XYZ's is currently levered. It used to be all-equity, but it recently borrowed and used the money to repurchase 30,000 shares. Financial details for the current and old capital structures are presented in the table below.
Assume that XYZ's generates perpetual annual EBIT at a constant level. Assume that all
Juan Allman is a shareholder in XYZ's who owns 30,000 shares. After the repurchase, Juan is unhappy with his dividends. How many shares does Juan have to buy (sell) in order to return his annual cash flows to what they were under the all-equity capital structure? (Assume that Juan had the same number of shares under the old structure.)
|
Capital Structure |
Capital Structure |
|
|
Old (All-Equity) |
Current (Levered) |
|
|
EBIT |
$120,000 |
$120,000 |
|
Debt, D |
$0 |
$450,000 |
|
Cost of Debt, |
N/A |
6% |
|
Shares Outstanding |
100,000 |
70,000 |
|
Stock Price |
$15.00 |
$15.00 |
|
Dividends per share |
$1.20 |
$1.3286 |
(Indicate in your answer if it is sell or buy)
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