Wigdor Manufacturing Is Currently All Equity Financed,has an EBIT of $2

question 38

Essay

Wigdor Manufacturing is currently all equity financed,has an EBIT of $2 million,and is in the 34% tax bracket. Louis,the company's founder,is the lone shareholder.
If the firm were to convert $4 million of equity into debt at a cost of 10%,what would be the total cash flow to Louis if he holds all the debt?
Compare this to Louis' total cash flow if the firm remains unlevered.

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