Identical projects that generate free cash flows

Reference no: EM131117996

Suppose there are no taxes. Firm ABC has no debt, and firm XYZ has debt of $5000 on which it pays interest of 10% each year. Both companies have identical projects that generate free cash flows of $800 or $1000 each year. After paying any interest on debt, both companies use all remaining free cash flows to pay dividends each year.

a.Fill in the table below showing the payments debt and equity holders of each firm will receive given each of the two possible levels of free cash flows.

b. Suppose you hold 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% of the equity of XYZ. If you can borrow at 10%, what is an alternative strategy that would provide the same cash flows?

Reference no: EM131117996

Questions Cloud

Financial decisions on southwick current : a. The firm reduces its inventories by $500,000 through more efficient inventory management procedures and invests the proceeds in marketable securities.

How much was shaped by the environment and experiences : What are the limitations and disadvantages of using this other theory to describe someone's personality compared to the Big 5? Are there advantages to using this theory to describe another's personality compared to the Big 5 theory?

Fielder company obtained land by issuing : Fielder Company obtained land by issuing 2,000 shares of its $10 par value common stock. The land was recently appraised at $85,000.

What is hobbes view of human nature : What is Hobbes's view of human nature? What, according to Hobbes motivates human beings and what is the purpose of the state? How does Locke's notion of a social contract compare with that of Hobbes?

Identical projects that generate free cash flows : Suppose there are no taxes. Firm ABC has no debt, and firm XYZ has debt of $5000 on which it pays interest of 10% each year. Both companies have identical projects that generate free cash flows of $800 or $1000 each year. After paying any interest..

What amounts should each of the three assets : At what amounts should each of the three assets be recorded?

Understand the nature of african society : How might a historian use the source Sundiata to understand the nature of African society during the feudal period? What specific themes, plot devices, characterizations, setting, symbolism, imagery, and/or language structures might be most valuab..

Different areas more culturally similar or dissimilar : Compare the Western world (i.e., Europe, the Middle East, and Africa) with the Eastern world (Asia and Oceania) and the Americas, explain whether you find the two different areas more culturally similar or dissimilar.

What are levels of success this product or method claims : How much does this method/product seem to rely on personal stories/anecdotes, a single "independent" study, promotion by a well-known celebrity, testimonials by teachers or parents, etc.

User Account

All Pages