Question

Given the following for MD:

• EBIT = EBITDA = $870 million
• r_U = 15%
• t_c = 30%

1. What would be the total annual after-tax cash flow to all investors (debt and equity) if MD was an all-equity firm?
2. What would be the total annual after-tax cash flow to all investors (debt and equity) if MD has $1,500 million in debt at a 5% interest rate?
3. What is the annual net tax benefit of the $1,500 in debt from part 2?

Answer 1

EBIT= EBITDA=	$ 870 million
rU=	15%
tc=	30%
a) What would be the total annual after tax cash flow to all investors ( debt and equity) if MD was an all-equity firm?
Ans:
EBIT=	$ 870 million
Less: Tax @ 30%	$ 261 million
Annual After tax cash flow	$ 609 million
b) What would be the total annual after-tax cash flow to all investors (debt and equity) if MD has $1,500 million in debt at a 5% interest rate?
EBIT=	$ 870 million
Less: Interest ( $ 1500 million x 5 %)	$ 75 million
EBT	$ 795 million
Less: Tax @ 30%	$ 238.50 million
Annual After tax cash flow	$ 556.50 million
c) What is the annual net tax benefit of the $1,500 in debt from part 2?
Interest=	$ 1500 million x 5 %
Interest=	$ 75 million
Net tax benefit=	$ 75 million x 30%
Net tax benefit=	$ 22.50 million