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If ABC Co. has earnings before interest and taxes of $2 million with debt of $5 million, what is the total cash flow to bondholders and stockholders if the interest rate is 10 percent and the tax rate is 21 percent?Multiple choice question.$1,500,000$975,500$1,975,000$1,685,000

Question

If ABC Co. has earnings before interest and taxes of 2millionwithdebtof2 million with debt of 5 million, what is the total cash flow to bondholders and stockholders if the interest rate is 10 percent and the tax rate is 21 percent?Multiple choice question.1,500,0001,500,000975,5001,975,0001,975,0001,685,000

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Solution

To solve this problem, we need to follow these steps:

  1. Calculate the interest expense: This is done by multiplying the debt by the interest rate. So, 5million∗105 million * 10% = 500,000.

  2. Calculate the earnings after interest but before taxes (EBT): This is done by subtracting the interest expense from the earnings before interest and taxes (EBIT). So, 2million−2 million - 500,000 = $1.5 million.

  3. Calculate the taxes: This is done by multiplying the EBT by the tax rate. So, 1.5million∗211.5 million * 21% = 315,000.

  4. Calculate the earnings after taxes (EAT): This is done by subtracting the taxes from the EBT. So, 1.5million−1.5 million - 315,000 = $1,185,000.

  5. Calculate the total cash flow to bondholders and stockholders: This is done by adding the interest expense to the EAT. So, 500,000+500,000 + 1,185,000 = $1,685,000.

So, the total cash flow to bondholders and stockholders is $1,685,000.

This problem has been solved

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