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

Expert Solution

C. $2,360,000

After tax CF =

13 million shares x 10% = 1.3 million

+ tax on shares = .35/.65* 1.3 = 700,000

pretax cash flow =2,000,000

+6 million bonds x 6% interest = 360,000

cash flow before tax and interest = 2,360,000

Reconcile:

2,360,000

-360,000 interest pmts

-700,000 taxes

C. $2,360,000 (cash flow before tax and interest = 2,360,000)

Renze Joy Candido answered 3 years ago

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?

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Question

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?

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Expert Solution

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