Answer:
A. $450
B. $480
C. $540
D. The choice of capitl structure is irrelevant because the amount of $480 is the payoff amount based on the proposed capital structure with 30% debt, which indicate that investors cannot make use of home leverage to help create the capital structure as well as the payoffs they like.
Explanation:
a) Calculation to determine her cash flow under the current capital structure
First step is to calculate the earnings per share
EPS = $29,000 / 6,500 shares
EPS = $4.5
Now let calculate the cash flow under the current capital structure
Cash flow = $4.5*(100 shares)
Cash flow = $450
Therefore her cash flow under the current capital structure will be $450
b) Calculation to determine What will be the cash flow be under the proposed capital structure of the firm
First step is to calculate the earnings per share
First step is to calculate the MV of the firm
MV of the firm= $45(6,500)
MV of the firm= $292,500
Second step is to calculate the Debt
Debt = .30 x ($292,500)
Debt= $87,750
Third step is to calculate the Interest
Interest =8% x $87,750
Interest = $7,020
Fourth step is to calculate the repurchase shares
Repurchase shares =$87,750 / $45
Repurchase shares= 1,950
Fifth step is to calculate the Shrout new
Shrout new =6,500 - 1,950
Shrout new=4,550
Therefore, under the new capital structure,
EPS = (EBIT - Interest) / shares outstanding new
EPS = ($29,000 -$7,020) / 4,550shares
EPS =$21,980/4,550 shares
EPS =4.8
The shareholder will receive = $4.8*(100 shares) = $480
Therefore What will be the cash flow be under the proposed capital structure of the firm is $480
c) Calculation to Show how she could unlever her shares of stock to re-create the original structure.
Now she owns a total of 200 shares
Her payoff =[ (100 shares+100 shares) x $4.5 ]- [8% x $(100 shares x $45)]
Her payoff =(200shares×$4.5)-(8%×$4,500)
Her payoff =$900-$360
Her payoff= $540
Therefore Based on the above Calculation Allison did not successfully replicate the payoffs (b) under the proposed capital structure
d).Based on the above Calculation the choice of capitl structure is irrelevant because the amount of $480 is the payoff amount based on the proposed capital structure with 30% debt, which indicate that investors cannot make use of home leverage to help create the capital structure as well as the payoffs they like.
