A firm has a Capital Structure as follows: 1. The market value of the bonds is $

Question

A firm has a Capital Structure as follows: 1. The market value of the bonds is $2,000,000, 2. The market value of the Preferred Stock is $1,000,000. 3. Firm has 500,000 shares of common stock (equity) outstanding, selling for $20 per share The preferred stock share price is $50 and which a $4 dividend. Each share of common stock sells for $20 and pays a $1.00 dividend, which is expected to grow by 2% per year. The price of the bonds is $818, and the coupon rate is 5%. The bonds will mature in 10 years. The firm’s tax rate is 40%. The company has $2,500,000 in sales, and expenses of $1,000,000. The initial investment of $5,000,000 will be depreciated straight-line over 10 years. The project is expected to last 10 years.

What is the firm’s OCF ___________________________________Chapter 9

Explanation / Answer

sales 2,500,000 less:expense -1,000,000 Depreciation   [5,000,000/10] -500,000 Income before Interest and tax [EBIT] 1,000,000 LessTax [1000000*.40] - 400,000 Net Income 600,000 Add:depreciation (non cash) 500,000 operating cash flow 1,100,000

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