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 OWC 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 t...

Enterprise Value can be computed as NOPAT Interest Discount Rate For Firm A ...

Firms A and B are identical in their business activity. Both have following annual data: EBITDA 5,000.00;

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Question:

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