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Multiple Choice on Cash Flow and Debt Financing

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 40 %, there is a $15 million in common stock requiring an 11 % return, and $4.5 million in bonds requiring a 6.5 % return?
Question 1 answers
a. 1,650,000
b. 1,942,500
c. 3,042,500
d. 4,200,000

What is the proportion of assets in debt financing for a firm that expects a 20 % return on equity, a 17 % return on assets, and an 11 % return on debt? Ignore taxes.
Question 3 answers
a. 30.00 %
b. 33.33 %
c.43.33 %
d.48.33 %

Solution Preview

1. We first calculate the amount needed for each
Equityholders need = 15,000,000X11%= 1,650,000. This will be paid from net income. So net income should be 1,650,000. Debtholders need = 4,500,000X6.5% = ...

Solution Summary

The solution explains two multiple choice questions relating to cash flow needed to pay debt holders and proportion of assets in debt financing