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.
