Question

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?

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

Solutions

Expert Solution

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)

Related Solutions

How much will a firm need in cash flow before tax and interest to satisfy debtholders and equity holders if the tax rate is 35%, there is $13 million in common stock requiring a 10% return, and $6 million in bonds requiring a 6% return?
How much will a firm need in cash flow before tax and interest to satisfy debtholders and equity holders if the tax rate is 35%, there is $13 million in common stock requiring a 10% return, and $6 million in bonds requiring a 6% return? A. $1,392,000 B. $1,488,000 C. $2,360,000 D. $2,480,000
How much cash flow BEFORE tax and interest is necessary to support a project that requires $4 million annually for equity investors and $2 million annually in interest payments if the firm's tax rate is 35%?
How much cash flow BEFORE tax and interest is necessary to support a project that requires $4 million annually for equity investors and $2 million annually in interest payments if the firm's tax rate is 35%? A. $7.40 million B. $8.10 million C. $8.15 million D. $8.85 million
If equity investors require a 20% rate of return, what is the maximum acceptable amount of equity financing for a project with $2 million annual cash flows before tax and interest, $3 million in debt with a 10% coupon, and a 35% tax rate?
If equity investors require a 20% rate of return, what is the maximum acceptable amount of equity financing for a project with $2 million annual cash flows before tax and interest, $3 million in debt with a 10% coupon, and a 35% tax rate? A. $5.53 million B. $5.87 million C. $8.5 million D. $9.03 million  
Given the expected return of 12% for stocks and 6% for bonds, your retirement account is split between those two asset classes, how much money would have when you retire if you put in $5,000 each year and you work for 40 years?
Given the expected return of 12% for stocks and 6% for bonds, your retirement account is split between those two asset classes, how much money would have when you retire if you put in $5,000 each year and you work for 40 years? How much would you have if you put all your money in bonds? Or all your money in stocks?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT