Question

Pagemaster Enterprises is considering a change from its current capital structure. The company currently has an all-equity capital structure and is considering a capital structure with 30 percent debt. There are currently 2,150 shares outstanding at a price per share of $70. EBIT is expected to remain constant at $20,000. The interest rate on new debt is 10 percent and there are no taxes. a.Rebecca owns $30,100 worth of stock in the company. If the firm has a 100 percent payout, what is her cash flow

Answer 1

Answer:

Pagemaster Enterprises and Rebecca

If the firm has a 100 percent payout, Rebecca's cash flow is:

= $3,097.

Explanation:

a) Data and Calculations:

Outstanding shares = 2,150

Current price of shares = $70 per share

Market value of outstanding shares = $150,500 ($70 * 2,150)

Debt = 30% of $150,500 = $45,150

Equity = 1- 0.30 = 0.70 or 70%

Interest rate on new debt = 10%

Interest expense = $4,515 ($45,150 * 10%)

EBIT = $20,000

Interest   (4,515)

EBT =   $15,485

Dividend payout ratio = 100%

Rebecca's investment value = $30,100 = 20% ($30,300/$150,500 * 100)

Therefore, Rebecca's cash flow = $3,097 (20% of $15,485)