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

question 10

Essay

Wigdor Manufacturing is currently all-equity financed,has an EBIT of $2 million and has a corporate tax rate of 21 percent.Louis,the company's founder,is the lone shareholder.All earnings are paid out as dividends to Louis.If the firm were to convert $4 million of equity into debt,the cost would be 10 percent and Louis would hold all the debt.Assume Louis pays personal taxes on interest income at a rate of 37 percent but pays taxes on dividends at a rate of 20 percent.Calculate the total cash flow to Louis after he pays personal taxes if the firm is unlevered and if it is levered.

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Definitions:

Pulse Wheel Generator

A device that generates electrical pulses based on the rotation of a wheel, typically used in automotive applications for measuring speed or position.

ABS System

The Anti-lock Braking System, designed to help prevent the wheels on a vehicle from locking up while braking, allowing the driver to maintain more control during emergency stops.

Rotational Speed

The number of rotations per unit time, usually measured in revolutions per minute (RPM).

Voltage Generated

The production of electrical potential difference between two points in a circuit, often as a result of chemical reactions within batteries or by electromagnetic induction.