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Author Question: The Naugatuck Railway is currently all equity financed, but it is considering a leveraged capital ... (Read 143 times)

james0929

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on: Apr 25, 2021
The Naugatuck Railway is currently all equity financed, but it is considering a leveraged capital structure. Selected financial information for Naugatuck is provided in the table below. 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.
Under the proposed levered capital structure, Naugatuck will use all of the new debt to repurchase (and cancel) shares.
Bill Strong, a brakeman for the railway, bought 100 shares of Naugatuck at $40. Bill receives annual dividend income of $200 under the current capital structure. Bill likes the return on investment that he could earn under the proposed levered capital structure, but Naugatuck has announced that it will not go forward with the change in capital structure. If Bill borrows $2,400 and buys shares, then what are his annual investment cash flows?

​Capital StructureCapital Structure
​All EquityLevered
EBIT$200,000 $200,000
Debt, D0$1,500,000 
Cost of Debt, kd​N/A4%
Shares Outstanding100,00062,500
Stock Price$40.00 $40.00 
Earnings per share$2.00​
Dividend per share$2.00​

◦ $200
◦ $224
◦ $245
◦ $267
◦ $320
Corporate Finance Online ¦ Eakins, McNally ¦ 2nd Edition
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Marked as best answer by james0929 on Apr 25, 2021

Li Jun

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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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james0929

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Reply 2 on: Apr 25, 2021
Wow, this really help

lkanara2

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Reply 3 on: Yesterday
YES! Correct, THANKS for helping me on my review

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