Suppose there are no taxes. Firm ABC has no debt, and firm XYZ has debt of $3,000 on which it pays interest of 10% each year. Both companies have identical projects that generate free cash flows of $1,000 or $1,300 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 10%, 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 FCF $1,000 $1,300 Debt Payments $0 $0 Equity Dividends $ 1000 $ 1300 Debt Payments $ 300 $ 300 XYZ Equity Dividends $ 700 $ 1000 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.) Buy 10% of ABC debt, and Buy 10% of ABC equity.
Suppose there are no taxes. Firm ABC has no debt, and firm XYZ has debt of $3,000 on which it pays interest of 10% each year. Both companies have identical projects that generate free cash flows of $1,000 or $1,300 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 10%, 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 FCF $1,000 $1,300 Debt Payments $0 $0 Equity Dividends $ 1000 $ 1300 Debt Payments $ 300 $ 300 XYZ Equity Dividends $ 700 $ 1000 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.) Buy 10% of ABC debt, and Buy 10% of ABC 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 $3,000 on which it pays
interest of 10% each year. Both companies have identical projects that generate free cash flows of $1,000 or
$1,300 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 10%, 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
FCF
$1,000
$1,300
Debt Payments
$0
$0
Equity Dividends
$ 1000
$ 1300
Buy 10% of ABC equity.
Debt Payments
$ 300
$ 300
XYZ
Equity Dividends
$ 700
$ 1000
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.)
Buy 10% of ABC
debt, and
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