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2 Firms A and B are identical in their business activity. Both have following annual data: EBITDA 5,000.00; Depreciation=1,000.00 ; TAX=20% ; ΔOWC=0 and CAPEX=1,000.00Firm A has no debt; Firm B...

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2 Firms A and B are identical in their business activity. Both have following annual data: EBITDA 5,000.00; Depreciation=1,000.00 ; TAX=20% ; ΔOWC=0 and CAPEX=1,000.00Firm A has no debt; Firm B carries $30,000 debt with 10% annual coupon. Both firms pay out all cash left after paying all business payments and taxes .Which firm pays more to its stakeholders (i.e., bond and stockholders) and if firm B pays out more, then why?Assume that these firms operate in perpetuity and calculate their enterprise value (i.e., value of stocks and bonds combined). Make an argument for use of NOPAT.
Answered 1 days After Mar 04, 2022

Solution

Rochak answered on Mar 06 2022
104 Votes
Firm A Pay-out:
    Particulars
    Amount
    EBITDA
     5,000
    Less: Depreciation
     1,000
    EBIT
     4,000
    Less: Taxes (20%)
     800
    Net Income
     3,200
    Add: Depreciation
     1,000
    Less: CAPEX
     1,000
     OWC
     -
    Free Cash Flow
     3,200
Firm B Pay-out:
    Particulars
    Amount
    EBITDA
     5,000
    Less:...
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