Lydic Enterprises is considering a change from its current
capital structure. The company currently has an all-equity capital
structure and is considering a capital structure with 30 percent
debt. There are currently 4,400 shares outstanding at a price per
share of $60. EBIT is expected to remain constant at $43,850. The
interest rate on new debt is 6 percent and there are no
taxes.
a. Rebecca owns $33,000 worth of stock in the
company. If the firm has a 100 percent payout, what is her cash
flow? (Do not round intermediate calculations and round
your answer to 2 decimal places, e.g., 32.16.)
Shareholder cash flow
$
b. What would her cash flow be under the new
capital structure assuming that she keeps all of her shares?
(Do not round intermediate calculations and round your
answer to 2 decimal places, e.g.,
32.16.)
Shareholder cash flow
$
c. Suppose the company does convert to the new
capital structure. Show how Rebecca can maintain her current cash
flow. (Do not round intermediate calculations and round
your answer to the nearest whole number, e.g.,
32.)
Number of shares stockholder should sell
a. Value of the Company = 4,400 x 60 = 264,000
Rebecca's cash Flow = (33,000/264.000) x 43,850 = 5,481.25
b. Shares repurchased = (.30 x 264,000)/60 = 1,320
Net Income = 43,850 - .06(.30 x 264,000) = 39,098
EPS = 39,098/(4,400 -1,320) = 12.69
Shares Owned = 33,000/60 = 550
Rebecca's Cash Flow = 550 x 12.69 = 6,979.50
c. X = shares sold
(550 - X) x 12.69 + .06 x 60 x X = 5,481.25
6,979.50 - 12.69X + 3.6X = 5,481.25
9.09X = 1,498.25
X = 165 shares approximately
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