Chapter 16, Problem 8QP

a)

Summary Introduction

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

Introduction:

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

b)

Summary Introduction

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

Note: It is necessary to compute EPS under the planned capital structure to calculate the cash flow.

Introduction:

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

c)

Summary Introduction

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

Introduction:

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