Bruno's is considering a change from its current capital structure.Bruno's currently has an all-equity capital structure and is considering a capital structure with 30 percent debt.There are currently 6,500 shares outstanding at a price per share of $46.EBIT is expected to remain constant at $43,000.The interest rate on new debt is 8.5 percent and there are no taxes.Tracie owns $20,700 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)$1,998
B)$2,227
C)$2,815
D)$3,027
E)$3,499

Question

Quizplus · Accepted Answer

All-equity value = 6,500 × $46 = $299,000Shares repurchased = ($299,000 × 0.30)/$46 = 1,950 sharesEPS = [$43,000 - ($299,000)(0.30)(0.085)]/(6,500 - 1,950) = $7.7748Cash flow = ($7.7748) ($20,700/$46) = $3,499

Bruno's Is Considering a Change from Its Current Capital Structure