Hi, I got your response to the question was asked, however Could you indicate how you arrived at the? two?figures which is highlighted in yellow please
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?
Unleveraged 2000000X(100-34%) = 1,320,000
Tax on Dividends 1,320,000 X 28% = 369,600
Cash Flow 1,320-369,6 =950,400
2,000,000 ? 950,400 = 1,056,000 ( Where did you get the figure of $950,400)
Tax 1056000X28% =295680
Cash flow = 1056000-295680 = 760,320
Taxes 20% of 2M = 400,000 ( Why did you use a tax rate of 20%)
400,000 X 33% = 132000
Cash flow from interest 400,000-132000=268000
Cash flow from dividends 760320
Total cash flow 760320+268000=1028320