How much will a firm need in cash flow before tax and interest to satisfy debtholders and equityholders if the tax rate is 40%,there is $10 million in common stock requiring a 12% return,and $6 million in bonds requiring an 8% return?

Question

Quizplus · Accepted Answer

First, we need to calculate the amount of return required for the debtholders and equityholders:
Debtholders: $6 million x 0.08 = $480,000
Equityholders: $10 million x 0.12 = $1,200,000

Next, we need to calculate the total cash flow required before tax and interest:
Total CF = ($480,000 + $1,200,000)/ (1-0.4) = $2,480,000

Therefore, the firm will need $2,480,000 in cash flow before tax and interest to satisfy debtholders and equityholders. The best choice is C.

How Much Will a Firm Need in Cash Flow Before