Wigdor Manufacturing Is Currently All Equity Financed, Has an EBIT

question 16

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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Definitions:

Syntax

The set of rules, principles, and processes that govern the structure of sentences in a given language, especially the order of words.

Two-Word Phrases

Pairs of words combined to create a specific meaning or concept, often used in linguistics and study of syntax.

Gestalt Principle

A theory in psychology that proposes the human brain organizes visual elements into whole objects rather than the sum of separate parts.

Similarity

a principle in psychology and various sciences that objects or patterns that are similar to each other are more likely to be grouped together by the perception system.