Answered step by step
Verified Expert Solution
Link Copied!

Question

00
1 Approved Answer

Please help with formuals needed for blue cells Problem 14-5 Suppose there are no taxes. Firm ABC has no debt, and firm XYZ has debt

Please help with formuals needed for blue cells
image text in transcribed

Problem 14-5 Suppose there are no taxes. Firm ABC has no debt, and firm XYZ has debt Of $5 ,000 on which it pays interest Of each year. Both companies have identical projects that generate free cash flows Of $800 or $ 1 ,000 each year. After paying any interest on debt, both companies use all remaining free cash flows to pay dividends each year. Complete the steps below using cell references to given data or previous calculations. In some cases, a simple cell reference is all you need. TO copy/paste a formula across a row or down a column, an absolute cell reference or a mixed cell reference may be preferred. If a specific Excel function is to be used, the directions will specify the use of that function. DO not type in numerical data into a cell or function. Instead, make a reference to the cell in which the data is found. Make your computations only in the blue cells highlighted below. In all cases, unless otherwise directed, use the earliest appearance of the data in your formulas, usually the Given Data section. a. Fill in the table below showing the payments debt and equity holders of 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? Suppose you hold 10% of the equity of XYZ If you can borrow at 10%, what is an alternative strategy that would provide the same cash flows? Debt ABC Debt XYL Interest rate so $5,000 10% a. Fill in the table below showing the payments debt and equity holders of each firm will receive given each of the two possible levels of free cash flows. ABC Debt Pa ments $800 Equity Dividends Debt Pa ments Equity Dividends $1,000 b. Suppose you hold 10% of the equity Of ABC. What is another portfolio you could hold that would provide the same cash flows? Ownership 10% FCF=$800 FCF=$ 1 ,OOO Equity in ABC would provide cash flows Of Cash flows could be replicated by owning The debt cash flows would be The equity cash flows would be For total cash flows Of or of debt and or or or per year of equity ofXYZ per year per year per year, as you would get from buying ABC equity Suppose you hold 10% of the equity of XYZ If you can borrow at 10%, what is an alternative strategy that would provide the same cash flows? Ownership 10% FCF=$800 Equity in XYZ would provide cash flows Of Cash flows could be replicated by borrowing You would receive dividends Of You would pay interest Of Your total cash flow would be or and buying or in one case or FCF=$ 1 ,OOO per year of the equity Of ABC per year in another case per year, as you would get from buying XYZ equity

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access with AI-Powered Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Students also viewed these Finance questions