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: If Dynamo wishes to change its capital structure from 75 per cent to 60 per cent equity and use the debt proceeds to pay a special dividend to shareholders, how much debt should they issue?
A) $321
B) $375
C) $600
D) $225

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The Answer of 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: If Dynamo wishes to change its capital structure from 75 per cent to 60 per cent equity and use the debt proceeds to pay a special dividend to shareholders, how much debt should they issue?
A) $321
B) $375
C) $600
D) $225

Dynamo Company Produces Annual Cash Flows of $150 and Is