13. Lee & Long, a clothing manufacturer, is considering filing for bankruptcy. The firm has EBIT of $1.4 million and long-term debt of $40 million on which it pays interest at an average rate of 8.5%. It also has fixed assets (gross) totaling $60 million.

Depreciation averages 5% of gross fixed assets per year, and the long-term debt matures evenly over the next 20 years.

a. Calculate Lee & Long’s current cash flow.

b. Assume that Lee & Long’s management can convince its creditors to convert 25% of its debt into equity by exchanging their bonds for newly issued stock at book value. Calculate Lee & Long’s cash flow after the debt restructure.