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Author Question: The Kansas City Southern Railroad (KCSR) currently has a levered capital structure, but it is ... (Read 76 times)

ARLKQ

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on: Apr 25, 2021
The Kansas City Southern Railroad (KCSR) currently has a levered capital structure, but it is considering a proposal to issue new equity (@$15/share) and use the proceeds to retire its debt. Selected financial information for KCSR is provided in the table below. Assume that KCSR 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 4% (and yield of 4%). Assume that individual investors can borrow and lend at the same interest rate (and with the same terms) as corporations.
Charlie Jones, an engineer for the railway, owns 100 shares of KCSR. Charlie receives annual dividend income of $260 under the current capital structure. Charlie likes the lower risk and the return on investment that he could earn under the proposed all-equity capital structure, but Kansas City Southern has announced that it will not go forward with the change in capital structure. If Charlie sells 40 shares and lends the proceeds, then what is his return on investment?

​Capital StructureCapital Structure
​LeveredAll Equity
EBIT$300,000$300,000
Debt, D$1,000,000$0
Cost of Debt, kd​4%N/A
Shares Outstanding100,000200,000
Stock Price$15.00$15.00 
Earnings per share$2.60​
Dividend per share$2.60​

◦ 10.00%
◦ 12.00%
◦ 12.33%
◦ 15.50%
◦ 17.33%
Corporate Finance Online ¦ Eakins, McNally ¦ 2nd Edition
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Marked as best answer by ARLKQ on Apr 25, 2021

kaillie

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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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ARLKQ

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Reply 2 on: Apr 25, 2021
YES! Correct, THANKS for helping me on my review

Liamb2179

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Reply 3 on: Yesterday
Wow, this really help

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