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Star, Inc. a prominent consumer products firm, is debating whether or not to convert its...

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Finance

Star, Inc. a prominent consumer products firm, is debating whether or not to convert its all-equity capital structure to one that is 35% debt. Currently there are 6,000 shares outstanding and the price per share is $58. EBIT is expected to remain at $39,600 per year, forever. The interest rate on new debt is 7%, and there are no taxes.

a) Ms. Brown, a shareholder in the firm, owns 100 shares of stock. What is her cash flow under the current capital structure, assuming the firm has a dividend payout rate of 100%.

b) What will Ms. Browns cash flow be under the proposed capital structure of the firm? Assume she keeps all 100 of her shares.

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