Dronalution, Inc., a drone maker, is currently all equity financed. They are thinking of converting to 30% debt (at a 6% annual rate) and 70% equity. The firm has 5,000 shares outstanding at $53 per share. EBIT is $35,000, which will not change. Ignore taxes. Please use the template below to do your calculations and answer the discussion questions.

• Ms. Fisher owns 200 shares of the firm's stock. What is her cash flow under the current capital structure? Assume a dividend payout rate of 100 percent
• What will Ms. Fisher's cash flow be under the new capital structure? Assume she keeps all of the shares
• If Dronalution converts, but Ms. Fisher prefers the all-equity capital structure. How could she recreate the original capital structure?
• Explain the concept of leverage and why Dronalution's choice of capital structure is irrelevant

	Market Values - Firm
	Now	Proposed				Market Values - Ms. Fisher
	Equity	Debt	Equity			Now	Proposed
Shares o/s	5,000				Shares o/s
$/share	53				$/share
MV					MV
Percent		30%			Cash Flows:
Rate		6.00%			Div. Payout
MV
MV of Debt + Equity
EBIT	35,000
Div./share	7.00
Interest exp.