ABC Incorporation is thinking of converting its all-equity structure of capital to 40% debt, 60% common equity. Currently, the company's 10,000 outstanding shares are trading in the market at $49 per share. Its EBIT is $87,200 per year and is expected to remain the same forever. If the company chooses to convert the all-equity stocks to debt, the interest rate on new debt would be 7%. The company is exempted to pay any tax due to its nature of business. Assume that the company decided to convert its existing capital structure to the new one, but Saima does prefer the existing all equity capital structure. All parts are interrelated. Values from one part can be used to answer other parts.

g) How many shares she would need to sell?

h) assume she invested the proceed from the sale of shares from part g) in bonds at 7%. What interest she should earn from this investment?

i) How much divided she would receive under new capital structure assuming she sold some of shares ( part g)?

j) What will be her total earnings (both from an interest in bonds and dividends) under the new capital structure of the firm?

Answer rating: 100% (QA)

g To convert the capital structure to 40 debt and 60 common equity Saima would need to sell a certain number of shares to achieve this new ratio The t... View the full answer