Question: That is all the information i was given The purpose of this Exercise is to display your knowledge on the topic of capitalization and returns.
The purpose of this Exercise is to display your knowledge on the topic of capitalization and returns. A former student of mine is attempting to buy 6 Sonics in the Great State of Louisiana. Revenues for the 6 Sonics equal $12 million per year. Earning before taxes equal $2 million per year. Assume the tax rate is 40%. My former student is looking at 2 financial structures to accomplish the acquisition of 6 stores. Structure # 1 Acquisition Price $10 million Bank Debt $ 8 million Rate 5% 10-year maturity Interest only payments Seller Paper $ 2 million Interest only payments At the end of 10 years. What is the balance of the Bank Debt due at the end of 10 year? What is the balance of seller paper due at the end of 10 years? How much interest has been paid on the bank debt during the 10-year period? How much interest has been paid on the Seller Paper at the end of 10 years? How much in taxes have been paid to the government at the end of 10 years? How much in earnings or dividends have been retained or paid to the owner of the business over the 10 years? Assuming the business is sold for $10 million in year 10, how much money did the bank debt receive (principal and interest)? How much money did Seller Paper receive (principal and interest? How much money did the owner of the business receive (earnings/dividends)? Tips - Earnings before interest and taxes = $2mm a year for the next 10 years. Bank debt interest 5%, interest only, bank debt matures in 10 years. Seller Paper interest 7%, interest only, Seller Paper matures in 10 years. Taxes are 40%
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