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Author Question: The Atchison, Topeka &Santa Fe Railway (ATSFR) is currently all equity financed, but it is ... (Read 70 times)

Frost2351

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The Atchison, Topeka &Santa Fe Railway (ATSFR) is currently all equity financed, but it is considering a leveraged capital structure. Selected financial information for ATSFR is provided in the table below. Assume that ATSFR generates perpetual annual EBIT at a constant level. Assume that all cash flows occur at the end of the year and we are currently at the beginning of a year. Assume that taxes are zero. Assume that all of net income is paid out as a dividend. Assume that the debt is perpetual with an annual coupon rate of 3% (and yield of 3%). Assume that individual investors can borrow and lend at the same interest rate (and with the same terms) as corporations. 
Under the proposed levered capital structure, ATSFR will use all of the new debt to repurchase (and cancel) shares. 
Bill Strong, a brakeman for the railway, owns 100 shares of ATSFR. Bill receives annual dividend income of $150. Bill likes the return on investment that he could earn under the proposed levered capital structure. If ATSFR chooses not to change its capital structure, then what can Bill do to achieve the investment cash flows (and return on investment) that he would have received under the levered capital structure? (Assume that Bill would not sell shares during the repurchase.)

Capital StructureCapital Structure
All EquityLevered
EBIT$150,000 $150,000 
Debt, D0$1,500,000 
Cost of Debt, kdN/A3%
Shares Outstanding100,00050,000
Stock Price$30.00 $30.00 
Earnings per share$1.50
Dividend per share$1.50

◦ Borrow $1,500 and buy more shares.
◦ Invest an additional $1,500 and buy more shares.
◦ Borrow $3,000 and use it to buy more shares.
◦ Invest an additional $3,000 and buy 100 more shares.
◦ Sell 33.33 shares and lend the proceeds.


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Marked as best answer by Frost2351 on Apr 25, 2021

nickk12214

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Lorsum iprem. Lorsus sur ipci. Lorsem sur iprem. Lorsum sur ipdi, lorsem sur ipci. Lorsum sur iprium, valum sur ipci et, vala sur ipci. Lorsem sur ipci, lorsa sur iprem. Valus sur ipdi. Lorsus sur iprium nunc, valem sur iprium. Valem sur ipdi. Lorsa sur iprium. Lorsum sur iprium. Valem sur ipdi. Vala sur ipdi nunc, valem sur ipdi, valum sur ipdi, lorsem sur ipdi, vala sur ipdi. Valem sur iprem nunc, lorsa sur iprium. Valum sur ipdi et, lorsus sur ipci. Valem sur iprem. Valem sur ipci. Lorsa sur iprium. Lorsem sur ipci, valus sur iprem. Lorsem sur iprem nunc, valus sur iprium.
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Frost2351

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Reply 2 on: Apr 25, 2021
:D TYSM


flexer1n1

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Reply 3 on: Yesterday
Wow, this really help

 

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