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12 November, 06:53

Bruno's is considering changing from its current all-equity capital structure to 30 percent debt. There are currently 7,500 shares outstanding at a price per share of $39. EBIT is expected to remain constant at $23,000. The interest rate on new debt is 7.5 percent and there are no taxes. Tracie owns $12,675 worth of stock in the company. The firm has a 100 percent payout. What would Tracie's cash flow be under the new capital structure assuming that she keeps all of her shares?

A. $998

B. $1,109

C. $1,115

D. $1,037

E. $1,016

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  1. 12 November, 07:53
    0
    E. $1,016

    Explanation:

    All-equity value = 7500 * 39 = 292500

    shares repurchases = 292500 * 0.3/39 = 2250

    EPS = (23000 - 292500 * 0.3 * 0.075) / (7500-2250)

    = 3.127

    cash flow = 12675/39 * 3.127 = 1016
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