How will debt issue affect annual dividend income

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Reference no: EM131586716

Gabella's is an all-equity firm that has 36,000 shares of stock outstanding at a market price of $27 a share. The firm has earnings before interest and taxes of $57,600 and has a 100 percent dividend payout ratio. Ignore taxes. Gabella's has decided to issue $125,000 of debt at a rate of 9 percent and use the proceeds to repurchase shares. Terry owns 800 shares of Gabella's stock and has decided to continue holding those shares. How will Gabella's debt issue affect Terry's annual dividend income?

A- Increase from $2,160 to $1,890

B - Increase from $1,890 to $2,160

C - Decrease from $640 to $591

D - Decrease from $640 to $567

E - No change

Reference no: EM131586716

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