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Compare to david total cash flow if firm remains unlevered

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Problem 1: David Lee Manufacturing Co. is currently all-equity financed, has an EBIT of $2 million and is in the 34 percent tax bracket. David, the company's founder, is the lone shareholder. All earnings are paid out as dividends to David. If the firm were to convert $4 million of equity into debt at a cost of 10 percent, what would be the total cash flow to David if he holds all the debt? Compare this to David's total cash flow if the firm remains unlevered.

Reference no: EM132965474

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