Question
Suppose there are no taxes. Firm ABC has no debt, and firm XYZ has debt of $ 6 comma 000$6,000 on which it pays interest
Suppose there are no taxes. Firm ABC has no debt, and firm XYZ has debt of
$ 6 comma 000$6,000
on which it pays interest of
10 %10%
each year. Both companies have identical projects that generate free cash flows of
$ 6 comma 600$6,600
or
$ 6 comma 200$6,200
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 for each firm and the dividend payments the equity holders of each firm will receive given each of the two possible levels of free cash flows.
b. Suppose you hold
10 %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 %10%
of the equity of XYZ. If you can borrow at
10 %10%,
what is an alternative strategy that would provide the same cash flows?
a. In the table below, fill in the debt payments for each firm and the dividend payments the equity holders of each firm will receive given each of the two possible levels of free cash flows.(Round all answers to the nearest dollar.)
ABC | XYZ | |||
FCF | Debt Payments | Equity Dividends | Debt Payments | Equity Dividends |
$6 comma 6006,600 | $nothing | $nothing | $nothing | $nothing |
$6 comma 2006,200 | $nothing | $nothing | $nothing | $nothing |
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