Question

Bruno's is considering changing from its current all-equity capital structure to 30 percent debt. There are currently 7,500 shares outstanding at a price per share of $39. EBIT is expected to remain constant at $23,000. The interest rate on new debt is 7.5 percent and there are no taxes. Tracie owns $12,675 worth of stock in the company. The firm has a 100 percent payout. What would Tracie's cash flow be under the new capital structure assuming that she keeps all of her shares?
A. $998
B. $1,109
C. $1,115
D. $1,037
E. $1,016

Answer 1

Answer:

E. $1,016

Explanation:

All-equity value = 7500 * 39 = 292500

shares repurchases = 292500 * 0.3/39 = 2250

EPS = (23000 - 292500 * 0.3 * 0.075)/(7500-2250)

= 3.127

cash flow = 12675/39 * 3.127 = 1016