Firms A and B are identical in their business activity. Both have following annual data: EBITDA 5,000.00; Depreciation=1,000.00 ; TAX=20% ; OWC=0 and CAPEX=1,000.00

Firms A and B are identical in their business activity. Both have following annual data: EBITDA 5,000.00; Depreciation=1,000.00 ; TAX=20% ;  ΔOWC=0 and CAPEX=1,000.00  

Firm A has no debt; Firm B carries $30,000 debt with 10% annual coupon. Both firms pay out all cash left after paying all business payments and taxes.  Which firm pays more to its stakeholders (i.e., bond and stockholders) and if firm B pays out more, then why? 

Assume that these firms operate in perpetuity and calculate their enterprise value (i.e., value of stocks and bonds combined). Make an argument for use of NOPAT. 

 

	Firm A	FIirm B
EBITDA	5,000	5,000
less dep	1,000	1,000
OE	4,000	4,000
Interest	0	3,000
EBT	4,000	1,000
T	800	200
Net Earnings	3,200	800
Firm B pays more to its stakeholders by 600 (800+3000) due to tax savings on interest expense
NOPAT = OE*(1-T)
NOPAT	3200	3200
Enterprise Value	4,200	4,800
Enterprise value as perpetuity @10%
	42,000	48,000