Question
In: Finance
The Day Company and the Knight Company are identical in every respect except that Day is...
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The Day Company and the Knight Company are identical in every respect except that Day is not levered. Financial information for the two firms appears in the following table. All earnings streams are perpetuities, and neither firm pays taxes. Both firms distribute all earnings available to common stockholders immediately. |
| Day | Knight | ||||
| Projected operating income | $ | 950,000 | $ | 950,000 | |
| Year-end interest on debt | − | $ | 105,000 | ||
| Market value of stock | $ | 4,000,000 | $ | 2,500,000 | |
| Market value of debt | − | $ | 1,750,000 | ||
| a-1 |
What will the annual cash flow be to an investor who purchases 10 percent of Knight's equity? (Do not round intermediate calculations. Round your answer to the nearest whole number, e.g., 32.) |
| Cash flow | $ |
| a-2 |
What is the annual net cash flow to the investor if 10 percent of Day's equity is purchased instead? Assume that borrowing occurs so that the net initial investment in each company is equal. The interest rate on debt is 6 percent per year. (Do not round intermediate calculations. Round your answer to the nearest whole number, e.g., 32.) |
| Net cash flow | $ |
| b. | Given the two investment strategies in (a), which will investors choose? |
Solutions
jeff jeffy answered 4 months agoRelated Solutions
The Day Company and the Knight Company are identical in every respect except that Day is...
The Day Company and the Knight Company are identical in every
respect except that Day is not levered. Financial information for
the two firms appears in the following table. All earnings streams
are perpetuities, and neither firm pays taxes. Both firms
distribute all earnings available to common stockholders
immediately. Day Knight Projected operating income $ 1,200,000 $
1,200,000 Year-end interest on debt − $ 100,000 Market value of
stock $ 4,500,000 $ 2,750,000 Market value of debt − $ 2,000,000...
The Day Company and the Knight Company are identical in every respect except that Day is...
The Day Company and the Knight Company are identical in every
respect except that Day is not levered. Financial information for
the two firms appears in the following table. All earnings streams
are perpetuities, and neither firm pays taxes. Both firms
distribute all earnings available to common stockholders
immediately.
Day
Knight
Projected operating income
$
1,300,000
$
1,300,000
Year-end interest on debt
−
$
84,000
Market value of stock
$
4,700,000
$
2,850,000
Market value of debt
−
$...
The Veblen Company and the Knight Company are identical in every respect except that Veblen is...
The Veblen Company and the Knight Company are identical in every
respect except that Veblen is unlevered. The market value of Knight
Company’s 4 percent bonds is $2.1 million. Financial information
for the two firms appears here. All earnings streams are
perpetuities. Neither firm pays taxes. Both firms distribute all
earnings available to common stockholders immediately.
Veblen
Knight
Projected operating income
$
1,300,000
$
1,300,000
Year-end interest on debt
−
84,000
Market value of stock
4,700,000
2,850,000
Market value...
Company C is identical to Company D in every respect except that Company C uses LIFO...
Company C is identical to Company D in every respect except that
Company C uses LIFO and Company D uses average costs. In an
extended period of rising inventory costs, Company C's gross profit
and inventory turnover ratio, compared to Company D's, would
be:
Gross Profit
Inventory Turnover
a.
higher
higher
b.
higher
lower
c.
lower
lower
d.
lower
higher
Multiple Choice
Option C
Option A
Option B
Option D
A company uses the periodic average cost method to account...
Consider two economies in which the population is stable; they are identical in every respect except...
Consider two economies in which the population is stable; they
are identical in every
respect except that households in economy A save more of their
income than households in
economy B. How will these economies differ in terms of the level of
output, labour
productivity, and the growth rates of output and productivity?
Explain.
Now consider countries C and D, both identical except that firms in
country C allocate more
resources to research and development (which tends to lead to...
Companies U and L are identical in every respect except that U is unlevered while L...
Companies U and L are identical in every respect except that U
is unlevered while L has $8 million of 6% bonds outstanding.
Assume: (1) All of the MM assumptions are met. (2) Both firms are
subject to a 25% federal-plus-state corporate tax rate. (3) EBIT is
$3 million. (4) The unlevered cost of equity is 9%.
What value would MM now estimate for each firm? (Hint:
Use Proposition I.) Enter your answers in millions. For example, an
answer of...
Companies U and L are identical in every respect except that U is unlevered while L...
Companies U and L are identical in every respect except that U
is unlevered while L has $8 million of 5% bonds outstanding. Assume
that: (1) All of the MM assumptions are met. (2) Both firms are
subject to a 35% federal-plus-state corporate tax rate. (3) EBIT is
$2 million. (4) The unlevered cost of equity is 10%. What value
would MM now estimate for each firm? (Hint: Use Proposition I.)
Enter your answers in millions. For example, an answer...
Companies U and L are identical in every respect except that U is unlevered while L...
Companies U and L are identical in every respect except that U
is unlevered while L has $10 million of 6% bonds outstanding.
Assume: (1) All of the MM assumptions are met. (2) Both firms are
subject to a 25% federal-plus-state corporate tax rate. (3) EBIT is
$5 million. (4) The unlevered cost of equity is 12%.
a.)
What value would MM now estimate for each firm? (Hint: Use
Proposition I.) Enter your answers in millions. For example, an
answer...
Companies U and L are identical in every respect except that U is unlevered while L...
Companies U and L are
identical in every respect except that U is unlevered while L has
$8 million of 5% bonds outstanding. Assume: (1) All of the MM
assumptions are met. (2) Both firms are subject to a 25%
federal-plus-state corporate tax rate. (3) EBIT is $2 million. (4)
The unlevered cost of equity is 12%.
What value would MM
now estimate for each firm? (Hint: Use Proposition I.)
Enter your answers in millions. For example, an answer of...
Companies U and L are identical in every respect except that U is unlevered while L...
Companies U and L are identical in every respect except that U
is unlevered while L has $18 million of 8% bonds outstanding.
Assume that: (1) All of the MM assumptions are met. (2) Both firms
are subject to a 35% federal-plus-state corporate tax rate. (3)
EBIT is $2 million. (4) The unlevered cost of equity is 10%. What
value would MM now estimate for each firm? (Hint: Use Proposition
I.) Enter your answers in millions. For example, an answer...
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