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Author Question: Austin-Healey Motors Inc. is currently levered. It used to be all-equity, but it recently borrowed ... (Read 56 times)

tfester

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on: Apr 25, 2021
Austin-Healey Motors Inc. is currently levered. It used to be all-equity, but it recently borrowed and used the money to repurchase 50,000 shares. Financial details for the current and old capital structures are presented in the table below.
Assume that Austin-Healey 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 annual coupons at 3%. Assume that individual investors can borrow and lend at the same interest rate (and with the same terms) as corporations.
Nigel Mansell is a shareholder in Austin-Healey who owns 5,000 shares. After the repurchase, Nigel is unhappy with his dividends. How many shares does Nigel have to buy (sell) in order to return his annual cash flows to what they were under the all-equity capital structure? (Assume that Nigel had the same number of shares under the old structure.)

​Capital StructureCapital Structure
​Old (All-Equity)Current (Levered)
EBIT$150,000 $150,000 
Debt, D$0$1,500,000 
Cost of Debt, kd​N/A3%
Shares Outstanding100,00050,000
Stock Price$30.00 $30.00 
Dividends per share$1.50$2.10

◦ Sell 3,572 shares
◦ Sell 2,500 shares
◦ Sell 2,143 shares
◦ Buy 3,572 shares
◦ Buy 2,764 shares
Corporate Finance Online ¦ Eakins, McNally ¦ 2nd Edition
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Marked as best answer by tfester on Apr 25, 2021

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Reply #1 on: Apr 25, 2021
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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tfester

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Reply 2 on: Apr 25, 2021
Great answer, keep it coming :)

matt95

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Reply 3 on: Yesterday
Thanks for the timely response, appreciate it

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