The Day Company and the Knight Company are identical in every respect except that Day is...

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Finance

The Day Company and the Knight Company are identical in everyrespect except that Day is not levered. Financial information forthe two firms appears in the following table. All earnings streamsare perpetuities, and neither firm pays taxes. Both firmsdistribute all earnings available to common stockholdersimmediately.

Day Knight
  Projected operating income $ 1,300,000 $ 1,300,000
  Year-end interest on debt ? $ 84,000
  Market value of stock $ 4,700,000 $ 2,850,000
  Market value of debt ? $ 2,100,000

a-1
What will the annual cash flow be to an investor who purchases 5percent of Knight's equity? (Do not round intermediatecalculations. Round your answer to the nearest whole number, e.g.,32.)

  Cash flow $

a-2
What is the annual net cash flow to the investor if 5 percent ofDay's equity is purchased instead? Assume that borrowing occurs sothat the net initial investment in each company is equal. Theinterest rate on debt is 4 percent per year. (Do not roundintermediate calculations. Round your answer to the nearest wholenumber, e.g., 32.)
  Net cash flow $
b. Given the two investment strategies in (a), which willinvestors choose?
Knight
Day

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The Day Company and the Knight Company are identical in everyrespect except that Day is not levered. Financial information forthe two firms appears in the following table. All earnings streamsare perpetuities, and neither firm pays taxes. Both firmsdistribute all earnings available to common stockholdersimmediately. DayKnight Projected operating income$1,300,000$1,300,000 Year-end interest on debt?$84,000 Market value of stock$4,700,000$2,850,000 Market value of debt?$2,100,000 a-1What will the annual cash flow be to an investor who purchases 5percent of Knight's equity? (Do not round intermediatecalculations. Round your answer to the nearest whole number, e.g.,32.) Cash flow$ a-2What is the annual net cash flow to the investor if 5 percent ofDay's equity is purchased instead? Assume that borrowing occurs sothat the net initial investment in each company is equal. Theinterest rate on debt is 4 percent per year. (Do not roundintermediate calculations. Round your answer to the nearest wholenumber, e.g., 32.) Net cash flow$ b.Given the two investment strategies in (a), which willinvestors choose?KnightDay

		Day		Knight
Projected operating income	$	1,300,000	$	1,300,000
Year-end interest on debt		?	$	84,000
Market value of stock	$	4,700,000	$	2,850,000
Market value of debt		?	$	2,100,000