Firms A and B are identical in their business activity. Both have following annual data: EBITDA 5,000.00;
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Firms A and B are identical in their business activity. Both have following annual data: EBITDA 5,000.00; Depreciation=1,000.00 ; TAX=20% ; ΔOWC=0 and CAPEX=1,000.00
Firm A has no debt; Firm B carries $30,000 debt with 10% annual coupon. Both firms pay out all cash left after paying all business payments and taxes. Which firm pays more to its stakeholders (i.e., bond and stockholders) and if firm B pays out more, then why?
Assume that these firms operate in perpetuity and calculate their enterprise value (i.e., value of stocks and bonds combined). Make an argument for use of NOPAT.
Firm A | FIirm B | |
EBITDA | 5,000 | 5,000 |
less dep | 1,000 | 1,000 |
OE | 4,000 | 4,000 |
Interest | 0 | 3,000 |
EBT | 4,000 | 1,000 |
T | 800 | 200 |
Net Earnings | 3,200 | 800 |
Firm B pays more to its stakeholders by 600 (800+3000) due to tax savings on interest expense | ||
NOPAT = OE*(1-T) | ||
NOPAT | 3200 | 3200 |
Enterprise Value | 4,200 | 4,800 |
Enterprise value as perpetuity @10% | ||
42,000 | 48,000 |
Related Book For
Introduction To Corporate Finance
ISBN: 9781118300763
3rd Edition
Authors: Laurence Booth, Sean Cleary
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