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(Step-by-Step) Consider two firms: firm Without has no debt, and firm With has debt of $10,000 on which it pays interest of 5% per year. Both companies

Question: Consider two firms: firm Without has no debt, and firm With has debt of $10,000 on which it pays interest of 5% per year. Both companies have identical projects that generate free cash flows of $1,000 or $2,000 each year. Suppose that there are no taxes, and after paying any interest on debt, both companies use all remaining cash free cash flows to pay dividends each year.

Required: Fill in the table below showing the payments debt and equity holders of each firm will receive given each of the two possible levels of free cash flows (4 marks):

Without With
Free Cash Flow Interest Payments Equity Dividends Interest Payments Equity Dividends
1,000
2,000

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