Dynamo Company Produces Annual Cash Flows of $150 and Is

question 75

Multiple Choice

Dynamo Company produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 per cent equity and 25 per cent debt. Your analysis tells you that the appropriate discount rates are 10 per cent for the cash flows, and 7 per cent for the debt. You currently own 10 per cent of the shares. M&M Proposition 1: How much does Dynamo currently pay in interest, and how much will it have to pay after the restructuring in the prior problem, assuming that the cost of debt is constant?

• A) $42, $26.25
• B) $26.25, $42
• C) $160, $37.50
• D) $37.50, $160

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