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An all-equity cash-rich company is considering the following change in capital structure: _ borrow $50 million at an interest rate of 6.
$28,345
Questions:
1. Create the pro-forma balance sheet and income statement taking into account the proposed change in the capital structure, assuming the tax regime and payout policy (in terms of percentage of net income paid out as dividends) remain unchanged
2. Calculate the dividends per share for the current and proposed capital structure and discuss how capital structure affects the cash flows to shareholders
3. Discuss the benefits and costs of higher leverage
4.What are the costs of financial distress of the firm before the proposed share re-purchase? How do you expect them to change with leverage? Why?
