Question

Compuvac Company has just completed its first pass forecast using the projected balance sheet method. need a total of 13,050,00 The firm has determined that it needs $4 million in new debt which can be sold at par with a 10% annual coupon. Additionally, the firm will sell 500,000 shares of new common equity at $18.10 per share. Next year's expected dividend is $0.24 per share. 40% tax rate. Given this information, what is the incremental change in AFN for Compuvac going from the first pass to the second pass?

Answer 1

Answer:

Incremental change in AFB would be $ 480,000

Explanation:

(a) Debt = $ 4,000,000

Interest on debt = 10%  

Therefore, Interest outgo on debt = 10% of Debt

=10% of $4,000,000

=$ 400,000

(b) Dividend payable = $0.48 per share(given)

No of shares = 500,000 (given)

Therefore, Outgo on account of dividend = $ 0.48 /share * no of shares

=$0.48 * 500,000

=$240,000

(c) Given, that tax in second would be $160,000 lesser. i.e., outgo would actually be lesser to that extent

Therefore, incremental AFN = (a)+(b)-(c) = $ 400,000 + $ 240,000 - $160,000 = $480,000

Incremental change in AFB would be $480,000