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31 January, 20:52

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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  1. 31 January, 22:24
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    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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