Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Suppose there are no taxes. Firm ABC has no debt, and rm XYZ has debt 0104000 on which it pays interest of1D% each year. Both

image text in transcribed

image text in transcribed
Suppose there are no taxes. Firm ABC has no debt, and rm XYZ has debt 0104000 on which it pays interest of1D% each year. Both companies have identical projects that generate free cash ows of $4,500 or $4,400 each year. After paying any interest on debt, both companies use all remaining free cash ows to pay dividends each year. a. In the table below, ll in the debt payments for each lm and the dividend payments the equity holders ofeach rm will receive given each of the two possible levels of free cash flows. b. Suppose you hold 10% of the equity ofABC. What is another portfolio you could hold that would provide the same cash ows? c. Suppose you hold 10% of the equity of XYZ. It you can borrow at 10%, what is an alternative strategy that would provide the same cash ows? ABC XYZ FCF Debt Payments Equity Dividends Debt Payments Equity Dividends $4.500 0|:| 0 $:| $:| $4.400 $|:| $ $:| $:| b. It you hold 10% of the equity oft-\\BC. another portfolio you could hold that would provide the same cash ows would be: (Select from the dropdown menus and round to the nearest integer.) v _|%ot v debt, and v r%of v equity. c. If you hold 10% ot the equity of XYZ and can borrow at the same terms as XYZ, an altemative strategy that would provide the same cash ows would be: {Select from the drop-down menus and round to the nearest integer.) T an amount equal to D'Kmt E debt, and IE D01: of IE equity

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored 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

Recommended Textbook for

Modern Principles Microeconomics

Authors: Tyler Cowen, Alex Tabarrok

4th Edition

1319098762, 978-1319098766

More Books

Students also viewed these Economics questions

Question

Identify and cultivate mentor relationships.

Answered: 1 week ago