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left drop down options are either buy or sell right drop down options are either ABC or XYZ Suppose there are no taxes. Firm ABC
left drop down options are either buy or sell
right drop down options are either ABC or XYZ
Suppose there are no taxes. Firm ABC has no debt, and firm XYZ has debt of $2,000 on which it pays interest of 9% each year. Both companies have identical projects that generate free cash flows of $900 or $1,300 each year. After paying any interest on debt, both companies use all remaining free cash flows to pay dividends each year. a. In the table below, fill in the debt payments and equity dividends each firm will receive given each of the two possible levels of free cash flows. b. Suppose you hold 10% of the equity of ABC. What is another portfolio you could hold that would provide the same cash flows? c. Suppose you hold 10% of the equity of XYZ. If you can borrow at 9%, what is an alternative strategy that would provide the same cash flows? a. In the table below, fill in the payments debt and equity holders of each firm will receive given each of the two possible levels of free cash flows. (Round to the nearest dollar.) ABC XYZ FCF Debt Payments Equity Dividends Debt Payments Equity Dividends $ $900 $1,300 b. Suppose you hold 10% of the equity of ABC. What is another portfolio you could hold that would provide the same cash flow? (Select from the drop-down menus and round to the nearest integer.) 90% of % of debt, and equity. c. Suppose you hold 10% of the equity of XYZ. If you can borrow at 9%, what is an alternative strategy that would provide the same cash flow? (Select from the drop-down menus and round to the nearest integer.) % of debt, and v % of equity. Enter your answer in each of the answer boxesStep by Step Solution
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