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Effect of leverage on creditors and share holders.
In finance, as in accounting, the two sides of the balance sheet must be equal. In the previous problem, we valued the asset side of the balance sheet. To value the other side, we must value the debt and the equity, and then add them together.
0% Debt/ 100% Equity
25% Debt/75% Equity
50% Debt/50% Equity
Cash flow to creditors:
Interest
0
$125
$250
Pretax cost of debt
0.05
Value of debt:
(Interest/kd)
-
Cash flow to shareholders:
EBIT
$1,485
- Interest
Pretax profit
Taxes (@ 34%)
Net income
+ Depreciation
$500
- Capital Expense
+ change in net working capital
- Debt amortization
Residual Cash Flow (RCF)
Cost of equity
Value of equity (RCF/ke)
Value of equity plus value of debt
As the firm levers up, how does the increase in value get apportioned between the creditors and the shareholders?
Compute the value of investment - Date of purchase of the capital and Date that the capital starts to accumulate interest
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Debenture holders were paid $2,59,375 together with interest preferential creditors were pain in full. Expenses of liquidation came to $2,550 and cash on hand was $5,000, and assets realized $3,95,000. Calculate the liquidator's remuneration.
Preparation of Adjusted Trail Balance form the trail balance and the adjustments - Purpose an adjusted trial balance
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Would a rational risk-averse investor ever choose a portfolio entirely composed of debt? Would a rational risk-averse investor ever choose a portfolio entirely composed of equity?
multiple choice questions on funds and interests1.nbsp you have 10000 to invest. you do not want to take any risk so
Find the Financial Statements and Supplemental Data and look for one of the notes to the financial statements that provides Segment Information.)
Palmiero buy a patent from Vania Corporation for dollar 1,500,000 on January 1, 2010. The patent is being amortized over remaining life of ten years, expiring on January 1, 2010.
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Assuming that a 11% interest rate properly reflects the time value of money in this situation and that all maintenance and insurance costs are paid at the end of each year, find the present value for the options.
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