How much will a firm need in cash flow before tax and interest to satisfy debt holders and equity holders if: the tax rate is 35%, there is $13 million in common stock requiring a 10% return, and $6 million in bonds requiring an 6% return?

Question

Quizplus · Accepted Answer

First, we need to calculate the amount of return required for the equity and bond holders:
- Common stock requires a 10% return on $13 million, which is $1.3 million.
- Bonds require a 6% return on $6 million, which is $360,000.
Next, we add these two amounts together to get the total cash flow required before tax and interest:
$1.3 million + $360,000 = $1.66 million
Finally, we need to adjust for the tax rate by dividing by (1 - tax rate):
$1.66 million / (1 - 0.35) = $2.56 million
Therefore, the firm needs $2.56 million in cash flow before tax and interest to satisfy debt holders and equity holders.

How Much Will a Firm Need in Cash Flow Before