e there are notaxes. Firm ABc has no debt. and timmxYz has dett of ss o00 on whi

Question

e there are notaxes. Firm ABc has no debt. and timmxYz has dett of ss o00 on whichitpays inerestof 10s each year Both companies have identical proiects that generate feecashflows of sa00 orst.000 each year a. In the table interest debt both use al firm will receive given each of the two possible levels of free cash flows below fl in the debt payments and equity dvidends each c. Suppose you hold 10 of the equity of XYZ you can bonow at 10% what is an anematve strategv hat would peovide the same cash XYZ Equity Dividends Payments Equity Dividends FCF d provide the same cash fow? ISelect fom the drop-down menus and round to the nearest iteger) of XYZ debt, and provide the same cash fow? tom the drop-down merus and round the eg" v 10% of XYZ equity

Explanation / Answer

Answer .

ABC                                                                                XYZ

FCF     Debt Payments            Equity Dividends        Debt Payments            Equity Dividends

$800                0                                  800                              500                              300

$1,000             0                                  1000                            500                              500

B .Unlevered Equity = Debt + Levered Equity. Buy 10% of XYZ debt and 10%of XYZ Equity, get 50 + (30,50) = (80,100)

c. Levered Equity = Unlevered Equity + Borrowing. Borrow $500, buy 10% of ABC, receive (80,100) – 50 = (30, 50)

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