What will be cash flow under proposed capital structure


CS Cement Company is debating whether to convert its leveraged capital structure that has a D/E = 2.3 to one that is all-equity . Currently there are 43,290 shares outstanding and the share price is $7.00 which will remain the same under any capital structures structures (you can assume that there can be fractions of a share). The EBIT is $800,000 per year forever. The interest rate on debt is 10.0% . There are no taxes. The dividend payout ratio is 100%.

a) Mr. Dimitry owns 1,000 shares of equity. What is his cash flow under its current capital structure (leveraged D/E = 2.3)?

b) What will be his cash flow under the proposed capital structure (levered) if he keeps all his 1,000 shares?

c) Suppose JCS Cement Company does not change its capital structure but Mr. Dimitry prefers the All-equity capital structure. Explain how he can unlever the shares he currently owns of the leveraged company and obtain the cash flow under the proposed All-equity capital structure. Show all calculations and explain what he needs to do.

 

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Accounting Basics: What will be cash flow under proposed capital structure
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