Answer:
a. $684
b. $480.6
c. 63 shares
Explanation:
a. The calculation of cash flow under the current capital structure is given below:-
Earning per share = Net income ÷ Shares
= $26,220 ÷ 6,900
= $3.8 per share
Cash flow = Earning per share × Stock shares
=$3.8 × 180 shares
= $684
b. The calculation of cash flow be under the proposed capital structure is given below:-
Value = $59 × 6,900
= $407,100
Under the capital structure suggested the company would collect new debt in the amount of:
Debt = 0.35 × $4071,00
= $142,485
Which means the amount of the repurchased shares will be:-
Shares repurchased = $142,485 ÷ $59
= $2,415
The Company will have to make an interest payment on the new debt under the new capital structure. The net income with the interest payment will be:-
Net income = $26,220 - 0.10 × $142,485
=$11,971.5
This means that the EPS will come under the new capital structure
Earning per share = $11,971.5 ÷ 4,485 shares
= $2.67 per share
Since all profits are paid out as dividends, the shareholder receives:-
Shareholder cash flow = Earning per share × Stock shares
= $2.67 × 180 shares
= $480.6
c. The shareholder would sell 35% of their shareholdings
= Shares × Debt percentage
= 180 × 35%
= 63 shares
