Chapter 13, Problem 8QP

a)

Summary Introduction

To calculate:

The cash flow of Person M, a shareholder of the company, having 100 shares as per the current capital structure with an assumption that the company has a rate of dividend payment at 100%.

Introduction:

Leverage refers to the borrowing of an amount or debt to utilize for a purchase of equipment, inventory, and other assets of the company.

b)

Summary Introduction

To calculate: The cash flow of Person M as per the proposed capital structure, assuming that she has the same 100 shares.

Note: It is necessary to compute EPS (Earnings per share) under the planned capital structure to calculate the cash flow.

Introduction:

Leverage refers to the borrowing of an amount or debt to utilize for a purchase of equipment, inventory, and other assets of the company.

c)

Summary Introduction

To calculate: How Person M would convert her shares to re-establish the original capital structure.

To replicate the projected capital structure, the shareholder must sell their shares at 30% or 30 shares at an interest rate of 8%. Hence, compute the interest cash flow of the shareholder.

Introduction:

Leverage refers to the borrowing of an amount or debt to utilize for a purchase of equipment, inventory, and other assets of the company.

d)

Summary Introduction

To explain: The reason for the irrelevance in the capital structure of the company.

Introduction:

Leverage refers to the borrowing of an amount or debt to utilize for a purchase of equipment, inventory, and other assets of the company.