Use the Information for the Question(s)below

question 50

Essay

Use the information for the question(s)below.
Consider two firms: firm Without has no debt,and firm With has debt of $10,000 on which it pays interest of 5% per year.Both companies have identical projects that generate free cash flows of $1000 or $2000 each year.Suppose that there are no taxes,and after paying any interest on debt,both companies use all remaining cash free cash flows to pay dividends each year.
-Fill in the table below showing the payments debt and equity holders of each firm will receive given each of the two possible levels of free cash flows:

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Definitions:

Par Value

The face value of a bond or stock as stated by the issuing company, which does not necessarily coincide with its market value.

Expiration Date

In finance, this term often refers to the date on which a derivative contract, such as an option or futures contract, becomes void and ceases to trade.

Option Contract

A financial derivative contract that grants the buyer the right, but not the obligation, to buy or sell an asset at a specified price on or before a certain date.

Exercise Price

The price at which the holder of an option can buy or sell the underlying security.