Wigdor Manufacturing Is Currently All-Equity Financed,has an EBIT of $2

Essay

Wigdor Manufacturing is currently all-equity financed,has an EBIT of $2 million and has a corporate tax rate of 21 percent.Louis,the company's founder,is the lone shareholder.All earnings are paid out as dividends to Louis.If the firm were to convert $4 million of equity into debt,the cost would be 10 percent and Louis would hold all the debt.Assume Louis pays personal taxes on interest income at a rate of 37 percent but pays taxes on dividends at a rate of 20 percent.Calculate the total cash flow to Louis after he pays personal taxes if the firm is unlevered and if it is levered.