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What is cash flow under the current capital structure

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Natal Tool Manufacturing (NTM), a prominent consumer products manufacturer, is debating whether or not to convert its all-equity capital structure to one that is 40% debt. Currently, there are 3,000 shares outstanding and the price per share is US$70. EBIT is expected to remain at US$24,000 per year forever. The interest rate on new debt is 10%, and there is no taxes.

Question a) Ms. Aznar, a shareholder of the firm, owns 150 shares of stock. What is her cash flow under the current capital structure, assuming the firm has a dividend payout rate of 100%?

Question b) What will Ms. Aznar's cash flow under the proposed capital structure of the firm? Assume that she keeps all 100 of her shares.?

Question c) Suppose NTM does convert, but Ms. Aznar prefers the current all-equity capital structure. Show how she could un-lever her shares of stock to recreate the original capital structure.

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

Reference no: EM132519157

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