A B E F G H K L M Iranzo Ammunition is an all-equity firm that currently has 6,000,000 shares outstanding worth $50 per

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A B E F G H K L M Iranzo Ammunition Is An All Equity Firm That Currently Has 6 000 000 Shares Outstanding Worth 50 Per 1 (78.37 KiB) Viewed 74 times

A B E F G H K L M Iranzo Ammunition is an all-equity firm that currently has 6,000,000 shares outstanding worth $50 per share. The company's considering converting to a capital structure that is 50.0% debt. The firm expects EBIT to remain at $40,000,000 in perpetuity, and the interest rate on the debt would be 8.0%. Ignore taxes. a. If Javier owns 100 shares of stock, calculate his annual cash flow under the current capital structure. b. Calculate Javier's annual cash flow under the proposed capital structure. c. Assuming the firm decides to change the capital structure, calculate the number of shares Javier would need to sell to replicate the current all-equity capital structure. Show that by undoing the leverage his cash flow would be the same as in part a. 13 points Company: Percent debt under proposal 50% 6,000,000 Shares currently outstanding Current Stock Price 50 EBIT 40,000,000 Interest rate 8% Shareholder: Shares owned a. EPS (unlevered firm) Shareholder's cash flow b. Value Unlevered Firm Value of Debt (proposed) Shares bought back with debt Net Income (levered firm) EPS (levered firm) Shareholder's cash flow C. Javier should sell lend the proceeds at 8% Annual interest Javier would receive Cash flow from shares Javier holds Total cash flow to Javier LA 6A $ 100 $ 500,000,000