Desert Rose, Inc., a prominent consumer products firm, is debating whetherto convert its all-equity capital structure to one that is 30 percent debt. Currently, there are 6,500 sharesoutstanding, and the price per share is $45. EBIT is expected to remain at $29,000 per year forever. Theinterest rate on new debt is 8 percent, and there are no taxes. a) Allison, a shareholder of the firm, owns 100 shares of stock. What is her cash flow under the current capital structure, assuming the firm has a dividend payout rate 100%?B) What will Allison's cash flow be under the proposed capital structure of the firm? Assume she keeps all 100 of her shares. C) Suppose the company does convert, but Allison prefers the current all-equity capital structure. Show how she could unlever her shares of stock to re-create the original structure. D) Using your answere to part(c), explain why the company's choice of capitl structure is irrelevant. Show work and explain.
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Desert Rose, Inc., a prominent consumer products firm, is debating whetherto convert its all-equity...
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