Wigdor Manufacturing is currently all equity financed,has an EBIT of $2 million,and is in the 34% tax bracket. Louis,the company's founder,is the lone shareholder.
If the firm were to convert $4 million of equity into debt at a cost of 10%,what would be the total cash flow to Louis if he holds all the debt?
Compare this to Louis' total cash flow if the firm remains unlevered.

Question

Wigdor Manufacturing is currently all equity financed,has an EBIT of $2 million,and is in the 34% tax bracket. Louis,the company's founder,is the lone shareholder.
If the firm were to convert $4 million of equity into debt at a cost of 10%,what would be the total cash flow to Louis if he holds all the debt?
 Compare this to Louis' total cash flow if the firm remains unlevered.

Quizplus · Accepted Answer

The Answer of Wigdor Manufacturing is currently all equity financed,has an EBIT of $2 million,and is in the 34% tax bracket. Louis,the company's founder,is the lone shareholder.
If the firm were to convert $4 million of equity into debt at a cost of 10%,what would be the total cash flow to Louis if he holds all the debt?
 Compare this to Louis' total cash flow if the firm remains unlevered.

Wigdor Manufacturing Is Currently All Equity Financed,has an EBIT of $2