Business, 18.08.2020 16:01 WallaceHarrison123

The Day Company and the Knight Company are identical in every respect except that Day is not levered. Financial information for the two firms appears in the following table. All earnings streams are perpetuities, and neither firm pays taxes. Both firms distribute all earnings available to common stockholders immediately. Day Knight Projected operating $750,000 $ 750,000 income Year-end interest on debt $ 77,500 Market value of stock $3,600,000 $2,300,000 Market value of debt - $1,550,000 a-1. What will the annual cash flow be to an investor who purchases 10 percent of Knight's equity? (Do not round intermediate calculations and round your answer to the nearest whole number, e. g., 32.)
a-2. What is the annual net cash flow to the investor if 10 percent of Day's equity is purchased instead? Assume that borrowing occurs so that the net initial investment in each company is equal. The interest rate on debt is 5 percent per year. (Do not round intermediate calculations and round your answer to the nearest whole number, e. g., 32.)
X Answer is not complete.
a-1. Cash flow $ 67,250
a-2. Cash flow
b. Given the two investment strategies in (a), which will investors choose?

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The Day Company and the Knight Company are identical in every respect except that Day is not levered...

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