Given the Following Information for a Levered and Unlevered Firm

question 79

Multiple Choice

Given the following information for a levered and unlevered firm, calculate the difference in the cash flow available to investors. Assume the corporate tax rate is 40%. (Hint: Calculate the tax savings arising form the tax deductibility of interest payments) .

• A)$8
• B)$18
• C)$78
• D)$90

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Definitions:

Benchmark

A standard or point of reference against which the performance of a security, mutual fund, or investment manager can be measured.

Management Fee

A charge paid to a company's managers for their services, often a percentage of managed assets or profits.

Net Return

The profit or loss from an investment after all expenses, including taxes, fees, and costs, have been subtracted.

Market Neutral

An investment strategy aiming to achieve returns independent of the overall market direction by simultaneously buying assets expected to rise and shorting assets expected to fall.