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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 35 percent?

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mltn1980

Answer:

  • What is the total cash flow to bondholders and stockholders

$1,475,000  

Explanation:

To know total cash flow to bondholders and stockholders we have to find the interest that the company will paid to the bondholders  and then from the EBIT of $2 million calculate how much of the EBIT the company will get as Net Income.

  • Total Cash Flow to Bondholders

Total Debt $ 5,00 million

Interest Rate of 10%

Total Cash Flow to Bondholders $5,00 * 0,10 =  $0,50

  • Total Cash Flow to StockHolders

EBIT :  $2 million

Financial Expenses : $0,50

Taxes Expenses 35%: $0,53  

Total Cash Flow to Stockholders : $2 - $0,50 - $0,53 = $0,98

Total Cash Flow : $0,50 + $0,98 =  $1,475,000

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