Problem $16-22$ Homemade Leverage

The Day Company and the Knight Company are identical in every respect except that

Day is unlevered. Financial information for the two firms appears here. All earnings

streams are perpetuities. Neither firm pays taxes. Both firms distribute all earnings

available to common stockholders immediately.

a$-1.$ What will the annual cash flow be to an investor who purchases $10$ percent of

Knight's equity? $($Do not round intermediate calculations and enter your answer in

dollars, not millions of dollars, rounded to the nearest whole number, e$.$g$.,$

$1,234,567.)$

a$-2.$ What is the annual net cash flow to the investor if $10$ percent of Day's equity is

purchased instead? Assume that borrowing occurs so that the net initial investment

in each company is equal. The interest rate on debt is $4$ percent per year. $($Do not

round intermediate calculations and enter your answer in dollars, not millions of

dollars, rounded to the nearest whole number, e$.$g$.,1,234,567.)$