CAPITAL STRUCTURE AND THE COST OF CAPITAL External ...

Financial ratios follow the trajectory of sales and earnings. When sales are up, all ratios are improving and cash flow grows
larger. When sales are down, all ratios get weaker and cash flow drops to zero, as there is no money left for dividend
payment. Unlike Toy Inc., the cash flow of all-equity Toy Inc. is only made of dividend payments. When earnings are
growing, so does the cash flow. When incurring a loss, all-equity Toy's Inc.'s cash flow dries up.
All-equity Toy Inc.: Selected ratios
Today Next year: sales up 20%, costs up 10%
Next year: sales down 20%, costs
down 10%
TAT 1.43 1.50 1.19
FAT 2.50 6.00 4.00
D/E 0.00 0.00 0.00
Total debt ratio 0.00 0.00 0.00
LT debt ratio 0.00 0.00 0.00
TIE 0.00 0.00 0.00
Cash coverage 0.00 0.00 0.00
Profit margin 6.60% 12.65% -3.75%
ROA 9.43% 19.01% -4.48%
ROE 9.43% 19.01% -4.48%
Dividend per share $1.16 $2.66 $0.00
EPS $3.30 $7.59 -$1.50
Book value per share $35.00 $39.93 $33.50
Dividend yield ? ? 0%
All-equity Toy Inc.: Cash flows to claimholders
Today Next year: sales up 20%, costs up 10% Next year: sales down 20%, costs down 10%
CF to creditors $0.00 $0.00 $0.00
CF to shareholders $115.50 $265.65 $0.00
CF from assets $115.50 $265.65 $0.00
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