Explain why stars choice of capital structure is irrelevant

Assignment Help Financial Management

Reference no: EM131993680

Star, Inc., a prominent consumer products firm, is debating whether or not to convert its all-equity capital structure to one that is 50 percent debt. Currently there are 1,000 shares outstanding and the price per share is $65. EBIT is expected to remain at $37,500 per year forever. The interest rate on new debt is 8 percent, and there are no taxes.

1. Ms. Brown, a shareholder of the firm, owns 100 shares of stock. What is her cash flow under the current capital structure, assuming the firm has a dividend payout rate of 100 percent?

2. What will Ms. Brown's cash flow be under the proposed capital structure of the firm? Assume that she keeps all 100 of her shares?

3. Suppose Star does convert, but Ms. Brown prefers the current all-equity capital structure. Show how she could unlever her shares of stock to recreate the original capital structure.

4. Using your answer to part (c), explain why Star's choice of capital structure is irrelevant.

Reference no: EM131993680

Questions Cloud

Sales price variance and sales volume variance : Saginaw Company is a garden products wholesale firm. Calculate the sales price variance for December. Calculate the sales volume variance for December.

Gram negative and gram positive organisms : Ampicillin is a derivative of Penicilin, why does it give different results with gram negative and gram positive organisms?

What size quarterly deposits does stan have to make : What size quarterly deposits does Stan have to make into an account that pays 5.6% annual interest compounded quarterly to accomplish his goal?

Carrying a corn gene for red flower color : How would you outline the steps to develop a petunia plant carrying a corn gene for red flower color

Explain why stars choice of capital structure is irrelevant : Star, Inc., a prominent consumer products firm, is debating whether or not to convert its all-equity capital structure to one that is 50 percent debt.

What is the concept of high tuition and high aid : What is the concept of high tuition and high aid as a model for financing higher education as presented by Brian Auguste?

Recommendations for the early hearing detection : The National Institutes of Health have recommendations for the early hearing detection and intervention (EHDI)

Compute the degree of operating leverage for each process : Compute the degree of operating leverage for each process. What will be the increase in operating income for each system?

Evolution of plants has resulted in a trend of reduced water : The evolution of plants has resulted in a trend of reduced water loss as plants moved onto land." Explain this statement using moss, ferns

User Account

All Pages