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 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

Solutions

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)

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 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
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  
What is the WACC for a firm with equal amounts of debt and equity financing, a 17% before-tax company cost of capital, a 35% tax rate, and a 10% coupon rate on its debt that is selling at par value?
What is the WACC for a firm with equal amounts of debt and equity financing, a 17% before-tax company cost of capital, a 35% tax rate, and a 10% coupon rate on its debt that is selling at par value? A. 10.40% B. 14.25% C. 15.25% D. 16.00%  
What is the WACC for a firm with equal amounts of debt and equity financing, a 16% before-tax company cost of capital, a 35% tax rate, and a 10% coupon rate on its debt that is selling at par value?
What is the WACC for a firm with equal amounts of debt and equity financing, a 16% before-tax company cost of capital, a 35% tax rate, and a 10% coupon rate on its debt that is selling at par value? A. 10.40% B. 14.25% C. 15.13% D. 16.00%
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT