The Day Company and the Knight Company are identical in every respect except that Day is unlevered. Financial information for the two firms appears here.
| The Day Company and the Knight Company are identical in every respect except that Day is unlevered. Financial information for the two firms appears here. All earnings streams are perpetuities. Neither firm pays taxes. Both firms distribute all earnings available to common stockholders immediately. |
| Day | Knight | |
|---|---|---|
| Projected operating income | $ 750,000 | $ 750,000 |
| Year-end interest on debt | 77,500 | |
| Market value of stock | 3,600,000 | 2,300,000 |
| Market value of debt | 1,550,000 |
| a-1. | What will the annual cash flow be to an investor who purchases 10 percent of Knight's equity? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) |
| a-2. | What is the annual net cash flow to the investor if 10 percent of Day's equity is purchased instead? Assume that borrowing occurs so that the net initial investment in each company is equal. The interest rate on debt is 5 percent per year. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) |
Cash Flow:
Net Cash Flow:
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Authors: Cathy Davis
1st Edition
1447306481, 978-1447306481
