Why titanss choice of capital structure is irrelevant

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Reference no: EM132031419

Titans Inc.is debating whether or not to convert its all-equity capital structure to one that is 30 percent debt. Currently there are 5,500 shares outstanding and the price per share is $550. EBIT is expected to remain at $30,000 per year forever. The interest rate on new debt is 7 percent, and there are no taxes.

a) Ben Jonson, a shareholder of the firm, owns 100 shares of stock. What is his cash flow under the current capital structure, assuming the firm has a dividend payout rate of 100 percent?

b) What will Mr. Jonson's cash flow be under the proposed capital structure of the firm? Assume that he keeps all 100 of hir shares.

c) Suppose Titans does convert, but Ms. Jonson prefers the current all-equity capital structure. Show how he could unlever his shares of stock to recreate the original capital structure.

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

Reference no: EM132031419

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