I have attached a question as well as the solution which was given in the solution manual. However I am unsure how the various figures were arrived at.Could you indicate how were the various figures arrived at for both the levered and unlevered firm in the solution provided.
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.
Assume that all earnings are paid out as dividends. Now consider the fact that Louis
must pay personal tax on the firm's cash flow. Louis pays taxes on interest at a rate of
33%, but pays taxes on dividends at a rate of 28%. Calculate the total cash flow to
Louis after he pays personal taxes.
Questions I am unsure about : Could you provide how the various figures in this solution was arrived at
for both the unlevered and levered firm?