Question

Finch, incorporated, is debating whether or not to convert its all-equity capital structure to one that is 30 percent debt. currently, there are 13,000 shares outstanding and the price per share is $43. ebit is expected to remain at $72,800 per year forever. the interest rate on new debt is 6.5 percent, and there are no taxes. allison, a shareholder of the firm, owns 200 shares of stock. what is her cash flow under the current capital structure, assuming the firm has a dividend payout rate of 100 percent? note: do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. what will allison’s cash flow be under the proposed capital structure of the firm? assume she keeps all 200 of her shares. note: do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. assume that allison unlevers her shares and re-creates the original capital structure. what is her cash flow now? note: do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. options: Allison's Cash Flow under the current capital structure with a 100% dividend payout rate: $43.00 Allison's Cash Flow under the proposed capital structure with 30% debt: To be calculated based on the given information. Allison's Cash Flow after unleveraging her shares and recreating the original capital structure: To be calculated based on the given information. (Placeholder for another option if needed)

Answer 1

Allison's cash flow under the current structure with a 100% payout is $1,120.00. Under the proposed 30% debt structure, her cash flow from 200 shares would decrease to $784.00. Without more details, we cannot calculate her cash flow after employing a personal levering strategy.

Step-by-step explanation:

To calculate Allison's cash flow under the current capital structure with a 100% dividend payout rate, we use the EBIT Earnings Before Interest and Taxes which remains at $72,800 per year as stated.

Since there are no taxes and the firm pays out everything as dividends, this amount is also the total dividends paid to shareholders. With 13,000 shares outstanding, the dividend per share is $72,800 / 13,000 = $5.60. Therefore, Allison's cash flow, owning 200 shares, is 200 * $5.60 = $1,120.00.

For the proposed capital structure with 30% debt, $72,800 * 0.30 = $21,840 would be used to pay interest on the new debt, resulting in $(72,800 - 21,840) = $50,960 available for dividends. Divided by the same number of shares, the new dividend per share would be $50,960 / 13,000 = $3.92, making Allison's cash flow from her 200 shares a total of 200 * $3.92 = $784.00.

If Allison unlevers her shares by, for instance, taking on personal debt equivalent to the 30% debt level the company would have taken on and invests the proceeds in more shares, her cash flow would be adjusted to reflect both the dividends from the shares and the cost of the personal debt interest.

However, since personal tax shields and exact adjustment mechanisms are not defined in the question, a numerical answer cannot be provided without further assumption.