You own 1,000 shares of a company, M&N Limited which is all-equity financed with 10,000 outstanding. The
Question:
You own 1,000 shares of a company, M&N Limited which is all-equity financed with 10,000 outstanding. The market price for each share is currently $40. M& N Limited follows a constant dividend policy, implying that it will pay the same dividend per share each year indefinitely. The dividend per share is $4.50 per year. The company is debating of converting into a 60% debt capital structure by using the proceeds from debt to repurchase shares and the expected dividend per share is $5.85. The interest rate on borrowings in general is 9% per annum. Ignore taxes.
You are required to answer the following questions:
(a) What is the value of your personal cash flow in M&N Limited based on the current capital structure and dividend policy of the company?
(b) What is the value of your personal cash flow in M&N Limited, based on the proposed 60% debt capital structure and dividend policy of the company?
Introduction to Management Science A Modeling and Cases Studies Approach with Spreadsheets
ISBN: 978-0078024061
5th edition
Authors: Frederick S. Hillier, Mark S. Hillier