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 35% debt. There are currently 6500 shares outstanding at a price per share of $50. EBIT is expected to remain constant at $89,856. The interest rate on new debt is 6% and there are no taxes.
Required:
(a) Rebecca owns $10,000 worth of stock in the company. If the firm has a 100% payout, what is her cash flow?
(b) What would her cash flow be under the new capital structure assuming that she keeps all of her shares?
(c)Suppose the company does convert to the new capital structure. Show how Rebecca can maintain her current cash flow-what number of shares should she sell?