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Wigdor Manufacturing Is Currently All Equity Financed, Has an EBIT

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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.


Definitions:

Complex Behavior

Actions or reactions of an organism that are influenced by a combination of genetic, learning, and environmental factors, demonstrating a high level of adaptability or problem-solving.

Chitins

A long-chain polymer of N-acetylglucosamine, a derivative of glucose, and a primary component of the cell walls of fungi and the exoskeletons of arthropods.

Annelids

A phylum of invertebrate animals known as segmented worms, which includes earthworms, leeches, and their relatives, characterized by a segmented body and a coelom.

Two Openings

Refers to organisms with a digestive system that has a distinct mouth and anus, allowing for a one-way flow of food and waste.

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