1. Tomy Inc. has a 0.6 probability of a good year with operating cash flow of $50,000, and 0.4 probability of a bad year with operating cash flow of $30,000. The company has a debt of $35,000 with 8% interest due next year. Assuming the company has no means of servicing its debt other than operations, and a 0% tax rate, which of the following is True:
a) Shareholders expected claim is $12,200
b) Creditors expected claim is $37,800
c) Creditors expected claim is $34680
d) None of the above.
2. Poto corporation has a net income of $20,000 and tax rate of 35%. Its total debt is $25,000 with Principal Payments of $5000 due at the end of each year and an annual interest rate of 8%. What will be Poto Corporations's interst tax shield in the upcoming year?
a) $8,750
b) $700
c) $9,450
d) $2,450