In: Accounting
How much will a firm need in cash flow before tax and interest to satisfy debtholders and equity holders if the tax rate is 40%, there is $10 million in common stock requiring a 12% return, and $6 million in bonds requiring an 8% return?
A. $1,392,000
B. $1,488,000
C. $2,480,000
D. $2,800,000
After tax CF =
10 million shares x 12% RR = 1.2 million
+ tax on shares = 40/60 * 1.2 = 800,000
pretax cash flow = 2,000,000
+6 million bonds x 8% interest = 480,000
cash flow before tax and interest = 2,480,000
Reconcile:
2,480,000
-480,000 interest pmts
-800,000 taxes
= 1,200,000 required
C. $2,480,000 (The cash flow before tax and interest = 2,480,000)