The Alto Horns Corp. is planning on introducing a new line of clarinets. They expected EBIT is $900,000. The unlevered cost of equity is 15%. The firm plans to raise $1,000,000 as a 10% interest perpetual debt. Assume depreciation, net working capital, and investment cash flows are 0. The corporate tax rate is 20%. Which of the following represents the correct annual cash flows to be used under the WACC method?
a. 490000
b. 640000
c. 420000
d. 600000
e. 525000

The correct option is B,correct annual cash flows to be used under WACC method is $640,000

Explanation:

Expected earnings before interest and tax is $900,000

interest expense on the 10% interest perpetual debt=10%*$1000,000=$100,000

earnings before tax=EBIT- interest expense=$900,000-$100,000=$800,000

earnings after tax=earnings before tax-tax expense

tax expense=earnings before tax*20%=$800,000*20%=$160,000

earnings after tax=$800,000-$160,000=$640,000

The correct amount of annual cash flow to be used under weighted average cost of capital method is $640,000 which after interest on debt and taxes have been deducted.

answer is a

explanation:

answer; organizational;