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)

Renze Joy Candido answered 2 years ago

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