Problem:
Staal Enterprises is considering a change from its current capital structure. Staal currently has an all-equity capital structure and is considering a capital structure with 30 percent debt. There are currently 4,000 shares outstanding at a price per share of $50. EBIT is expected to remain constant at $44,652. The interest rate on new debt is 5 percent and there are no taxes.
Required:
Question 1: Rebecca owns $30,000 worth of stock in the company. If the firm has a 100 percent payout, what is her cash flow?
Question 2: What would her cash flow be under the new capital structure assuming that she keeps all of her shares?
Question 3: Suppose the company does convert to the new capital structure. Show how Rebecca can maintain her current cash flow. Number of shares stockholder should sell,
Note: Please provide equation and explain comprehensively and give step by step solution.