Gabella's Is an All-Equity Firm That Has 21,000 Shares of Stock

Multiple Choice

Gabella's is an all-equity firm that has 21,000 shares of stock outstanding at a market price of $40 a share. The firm has earnings before interest and taxes of $84,000 and has a 100 percent dividend payout ratio. Ignore taxes. Gabella's has decided to issue $160,000 of debt at a rate of 12 percent and use the proceeds to repurchase shares. Travis owns 500 shares of Gabella's stock and has decided to continue holding those shares. How will Gabella's debt issue affect Travis' annual dividend income?

A) Decrease from $2,400 to $1,840
B) Increase from $2,400 to $2,160
C) Decrease from $2,000 to $1,906
D) Increase from $2,000 to $2,094
E) No change