Homemade Leverage [LO 1] FCOJ, Inc., a leading consumer products company, is debating whether or not to convert its all-equity capital structure to one that is 35% debt. There are currently 5,000 shares outstanding, and the price per share is $47. EBIT is expected to remain at $16,500 per year forever. The interest rate on the new debt is 7 percent and there are no taxes. 

Required: (a) Melanie, a shareholder in the company, owns 280 shares. What is its cash flow with the current capital structure, assuming the company has a dividend payout rate of 100 percent? (Do not round intermediate calculations. Round your answer to 2 decimal places (eg, 32.16). ) Cash flow from shareholders $ (b) What will Melanie's cash flow be based on the company's proposed capital structure? Suppose you keep all 280 shares. (Do not round intermediate calculations. Round your answer to 2 decimal places (eg, 32.16).) Shareholder Cash Flow $ (c) Assume FCOJ converts, but Melanie prefers the current total capital structure. Show how you could deleverage your stock to recreate the original capital structure. Number of shares that the shareholder must sell Show how you could deleverage your stock to recreate the original capital structure. Number of shares that the shareholder must sell Show how you could deleverage your stock to recreate the original capital structure. Number of shares that the shareholder must sell

Answer rating: 100% (QA)

a To calculate the cash flow from shareholders with the current capital structure we need to determi... View the full answer