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777dan777 [17]
3 years ago
12

Star, Inc., a prominent consumer products firm, is debating whether or not to convert its all-equity capital structure to one th

at is 20 percent debt. Currently there are 17,000 shares outstanding and the price per share is $47. EBIT is expected to remain at $39,100 per year forever. The interest rate on new debt is 6.5 percent, and there are no taxes.Ms. Brown, a shareholder of the firm, owns 150 shares of stock. What is her cash flow under the current capital structure, assuming the firm has a dividend payout rate of 100 percent? What will Ms. Brown’s cash flow be under the proposed capital structure of the firm? Assume that she keeps all 150 of her shares. Assume that Ms. Brown unlevers her shares and re-creates the original capital structure. What is her cash flow now?
Business
1 answer:
Dmitry_Shevchenko [17]3 years ago
6 0

Answer:

Explanation:

1)  The earnings per share are:

EPS = $39,100/17,000 shares

EPS = $2.30

Cash flow for the company is:

Cash flow = $2.30 X 150 shares

Cash flow = $345

2) Need to determine the EPS of the firm under the proposed capital structure. The market value of the firm is:

MV = $47*17,000  = $799,000

Under the proposed capital structure, the firm will raise new debt in the amount of  D = 0.20*$799,000 = $159,800 in debt. The number of shares repurchased will be:

Shares repurchased = $159,800/$47  = 3400

Under the new capital structure, the company will have to make an interest payment on the new debt. The net income with the interest payment will be:

NI = $39,100 – 0.065*$159,800  = $39100-10,387= $28,713

EPS under the new capital structure will be:

EPS = $28,713/13,600 shares  = $2.11

Shareholder cash flow = $2.11*150 shares  = $316.5

3)  In this case, capital structure is irrelevant because shareholders can create their own leverage or unlever the stock to create different capital structures. This has no connection with the capital structure that firm chooses.

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3 years ago
On January 1, 2020 (the date of grant), Ayayai Corporation issues 1,900 shares of restricted stock to its executives. The fair v
vagabundo [1.1K]

Answer and Explanation:

The journal entries are shown below:

On Jan 1, 2014

Unearned compensation Dr. $45,000

        To paid in capital in excess of par  $35,500

        To common stock  $9,500

(Being the unearned compensation is recorded)  

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Compensation expense Dr.  $15,000 ($45,000 ÷ 3 years)

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5 0
3 years ago
An oligopolistic market structure is distinguished by several characteristics, one of which is either similar or identical produ
mixas84 [53]

Answer: Option B and C

         

Explanation: In simple words, oligopoly refers to the market structure in which there are few firms operating at a huge level and selling products that are close but not absolute substitutes of each other.

     The high level of investment and too much of legal formalities makes it difficult to entry in such industries. Firms in such industries produce identical goods thus they do not compete in the amaretto with respect to price.

the firms operate their market on the basis of non price factors such as advertisements but still are mutually interdependent on each other as a minor decrease in price of other can deregulate the demand in the whole industry. Automobile sector is one the primary examples of oligopoly.

8 0
3 years ago
During its first year of operations, a company entered into the following transactions: Borrowed $20,000 from the bank by signin
Alenkinab [10]

Answer:

$62,400

Explanation:

Assets are Economic resources controlled by the entity as a result of past events from which cash is expected to flow into the business.

Assets include the following Amounts:

Cash from Bank Note              $20,000

Cash from Stock Issues           $40,000

Supplies Inventory                     $4,000

Payment for Supplies                ($1,600)

Total Available Assets             $62,400

5 0
3 years ago
Cabell Products is a division of a major corporation. Last year the division had total sales of $25,320,000, net operating incom
aalyn [17]

Answer:

ROI = Net operating income        x 100

         Average operating assets

ROI = $1,924,320   x 100

         $6,000,000

ROI = 32.1%

The correct answer is C

Explanation:

ROI is the ratio of net operating income to average operating assets multiplied by 100.

3 0
3 years ago
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