Final Exam Calculate the net cash flow to the company based on the following sce

Question

Final Exam Calculate the net cash flow to the company based on the following scenario The company has $500,000 in common stock. The common stock pays dividends of 8% per year The company pays 395% income tax rate. In 2016, the company had earnings before interest and taxes of $1,250,000. In 2017, the company had earnings before interest and taxes of $1,325,650 ry 1, 2017, the CFO converted 20% or the Common Stock to Bank Debt. The bank debl pays interest annually of 7%. 1) What is the net cash flow to the company for 2016? 2) What is the net cash flow to the company for 2017? 3) Which year has the more efficient capital structure? Give reasons as to support your answer ? ype here to search F2 F4 F5 F6 F7 F8 F9

Explanation / Answer

Answer = 1 & 2 CALCULATION OF THE CASH FLOW TO THE COMPANY FOR 2016 & 2017 2016 2017 Earning Before Taxes & Interest $          12,50,000 $   13,25,650 Interest on Conversion of Febt $                         -   $           7,000 ($ 500,000 X 20% = $ 100,000 X 7% ) Earning Before Taxes $          12,50,000 $   13,18,650 Less :Taxation @ 39.5% = $            4,93,750 $     5,20,867 Earning After Taxes $            7,56,250 $     7,97,783 Dividend $                40,000 $         32,000 ($ 500,000 * 8%) ($ 400,000 * 8%) Answer = Net Cash Flow $            7,16,250 $     7,65,783 Answer = 3 2017 Capital structure is more efficient because it carrying sum debts, Cost of Debt is less then cost of Shareholders plus there is deduction of interest for income tax also. So this will increase the net cash Available for company and increase the Earning per share also.

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