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What will the annual cash flow be to an investor

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Reference no: EM132797079

The Day Company and the Knight Company are identical in every respect except that Day is not levered. Financial information for the two firms appears in the following table. All earnings streams are perpetuities, and neither firm pays taxes. Both firms distribute all earnings available to common stockholders immediately.

Day and Knight Projected operating income is $1,350,000. Year-end interest on debt - Knight has 107,500. Market value of stock is $4,800,000 for day and $2,900,000 for Knight. Market value of debt for Knight $2,150,000

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 round your answer to the nearest whole number, e.g., 32.)

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 round your answer to the nearest whole number, e.g., 32.)

Reference no: EM132797079

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