Adams Inc Expects EBIT of $50 Million If There Is a a Recession

question 34

Essay

Adams Inc. expects EBIT of $50 million if there is a recession, $100 million if the economy is normal, and $150 million if the economy expands. Bellingham Inc. also expects EBIT of $50 million if there is a recession, $100 million if the economy is normal, and $150 million if the economy expands. Adams is financed entirely with equity while Bellingham is financed 50% with debt at 10%. Adams has $200 million in equity; Bellingham is financed with $100 million of debt and $100 million of equity. The tax rate is 30%. Both firms pay out all available earnings as dividends. If there is a recession, compare dividends and total distributions to investors for each company.

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Definitions:

Managerial Accounting

A type of accounting focused on providing financial information to managers within organizations to aid in decision-making and business strategy planning.

Cost Accounting

A method of accounting that focuses on calculating, recording, and analyzing all costs incurred by a business in producing goods or services.

Open-Book Accounting

A management approach where detailed financial information is shared with employees to help them understand the financial performance and make better decisions.

Cash Flow

The total amount of money being transferred in and out of a business, representing its financial health.