Question

1. A firm currently has 1,000,000 in total capital with 20% debt and no preferred stock. They pay 8% interest on debt, have a 250,000 EBIT and have 34% corporate tax rate. From the company's perspective, what's the cash flow to shareholders?

a. 146,520

b. 154,440

c. 170,440

d. 174,520

2. A firm currently has 1,000,000 in total capital with 20% debt and no preferred stock. They pay 8% interest on debt, have 250,000 EBIT and have 24% corporate tax rate. From the company's perspective, what's the cash flow to debt holders?

a. 4,080

b. 9,520

c. 16,000

d. 28,000

Answer 1

1.

Particulars	Amount
EBIT	$      2,50,000
Less : Interest ($ 200000* 8%)	$         16,000
EBT	$      2,34,000
Less: Tax @34%	$         79,560
EAT	$      1,54,440

Option B has to be selected

2

Cash flow to debt holders wiil be the interest paid

Debt is 20% of total capital $ 1000000

i.e., $ 200000

Interest = $ 200000 * 8%

= $ 16000

Option C has to be selected.

Pls do rate, if the answer is correct and comment, if any further assistance is required.