Suppose there are no taxes. Firm ABC has no debt, and firm XYZ has debt of $1,000 on which it pays interest of 12% each year. Both companies have identical projects that generate free cash flows of $900 or $1,400 each year. After paying any interest on debt, both companies use all remaining free cash flows to pay dividends each year. a. In the table below, fill in the debt payments and equity dividends 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 12%, what is an alternative strategy that would provide the same cash flows? a. In the table below, fill in the payments debt and equity holders of each firm will receive given each of the two possible levels of free cash flows. (Round to the nearest dollar.) ABC XYZ FCF Debt Payments Equity Dividends Debt Payments Equity Dividends $900 $1,400 b. Suppose you hold 10% of the equity of ABC. What is another portfolio you could hold that would provide the same cash flow? (Select from the drop-down menus and round to the nearest integer.) % of V debt, and % of v equity. c. Suppose you hold 10% of the equity of XYZ. If you can borrow at 12%, what is an alternative strategy that would provide the same cash flow? (Select from the drop-down menus and round to the nearest integer.) V % of V debt, and % of v equity.
Suppose there are no taxes. Firm ABC has no debt, and firm XYZ has debt of $1,000 on which it pays interest of 12% each year. Both companies have identical projects that generate free cash flows of $900 or $1,400 each year. After paying any interest on debt, both companies use all remaining free cash flows to pay dividends each year. a. In the table below, fill in the debt payments and equity dividends 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 12%, what is an alternative strategy that would provide the same cash flows? a. In the table below, fill in the payments debt and equity holders of each firm will receive given each of the two possible levels of free cash flows. (Round to the nearest dollar.) ABC XYZ FCF Debt Payments Equity Dividends Debt Payments Equity Dividends $900 $1,400 b. Suppose you hold 10% of the equity of ABC. What is another portfolio you could hold that would provide the same cash flow? (Select from the drop-down menus and round to the nearest integer.) % of V debt, and % of v equity. c. Suppose you hold 10% of the equity of XYZ. If you can borrow at 12%, what is an alternative strategy that would provide the same cash flow? (Select from the drop-down menus and round to the nearest integer.) V % of V debt, and % of v equity.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Suppose there are no taxes. Firm ABC has no debt, and firm XYZ has debt of $1,000 on which it pays interest of 12% each year. Both companies have identical projects that generate free cash flows of $900 or $1,400 each year. After paying any
interest on debt, both companies use all remaining free cash flows to pay dividends each year.
a. In the table below, fill in the debt payments and equity dividends 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 12%, what is an alternative strategy that would provide the same cash flows?
a. In the table below, fill in the payments debt and equity holders of each firm will receive given each of the two possible levels of free cash flows. (Round to the nearest dollar.)
АВС
XYZ
FCF
Debt Payments
Equity Dividends
Debt Payments
Equity Dividends
$900
$
$
$
$
$1,400
b. Suppose you hold 10% of the equity of ABC. What is another portfolio you could hold that would provide the same cash flow? (Select from the drop-down menus and round to the nearest integer.)
% of
debt, and
% of
equity.
c. Suppose you hold 10% of the equity of XYZ. If you can borrow at 12%, what is an alternative strategy that would provide the same cash flow? (Select from the drop-down menus and round to the nearest integer.)
% of
debt, and
% of
equity.
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