Assignment Problem: FCOJ, Inc., a prominent consumer products firm, is debating whether to convert its all-equity capital structure to one that is 20 percent debt. Currently, there are 12,000 shares outstanding, and the price per share is $87. EBIT is expected to remain at $25,200 per year forever. The interest rate on new debt is 8 percent, and there are no taxes.
Required:
1) Allison, a shareholder of the firm, owns 250 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 Allison's cash flow be under the proposed capital structure of the firm? Assume she keeps all 250 of her shares.
3) Assume that Allison unlevers her shares and re-creates the original capital structure. What is her cash flow now?
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