Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 10,500 shares of stock outstanding, currently worth $25 per share. Beta Corporation uses leverage in its capital structure. The market value of Beta's debt is $60,500, and its cost of debt is 7 percent. Each firm is expected to have earnings before interest of $70,500 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 7 percent per year. a. What is the value of Alpha Corporation? (Do not round intermediate calculations.) b. What is the value of Beta Corporation? (Do not round intermediate calculations.) c. What is the market value of Beta Corporation's equity? (Do not round intermediate calculations.) d. How much will it cost to purchase 20 percent of each firm's equity? (Do not round intermediate calculations.) e. Assuming each firm meets its earnings estimates, what will be the dollar return to each purchase in part (d) over the next year? (Do not round intermediate calculations.) Answer is not complete. a. Value of Alpha $ 262,500 b. Value of Beta $ 262,500 C. Market value of Beta's equity $ 202,000 d. Invest in Alpha $ 52,500 Invest in Beta $ 40,400 e. Alpha dollar return $ 14,100 Beta dollar return
Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 10,500 shares of stock outstanding, currently worth $25 per share. Beta Corporation uses leverage in its capital structure. The market value of Beta's debt is $60,500, and its cost of debt is 7 percent. Each firm is expected to have earnings before interest of $70,500 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 7 percent per year. a. What is the value of Alpha Corporation? (Do not round intermediate calculations.) b. What is the value of Beta Corporation? (Do not round intermediate calculations.) c. What is the market value of Beta Corporation's equity? (Do not round intermediate calculations.) d. How much will it cost to purchase 20 percent of each firm's equity? (Do not round intermediate calculations.) e. Assuming each firm meets its earnings estimates, what will be the dollar return to each purchase in part (d) over the next year? (Do not round intermediate calculations.) Answer is not complete. a. Value of Alpha $ 262,500 b. Value of Beta $ 262,500 C. Market value of Beta's equity $ 202,000 d. Invest in Alpha $ 52,500 Invest in Beta $ 40,400 e. Alpha dollar return $ 14,100 Beta dollar return
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Alpha Corporation and Beta Corporation are identical in every way except their capital
structures. Alpha Corporation, an all-equity firm, has 10,500 shares of stock outstanding,
currently worth $25 per share. Beta Corporation uses leverage in its capital structure.
The market value of Beta's debt is $60,500, and its cost of debt is 7 percent. Each firm is
expected to have earnings before interest of $70,500 in perpetuity. Neither firm pays
taxes. Assume that every investor can borrow at 7 percent per year.
a. What is the value of Alpha Corporation? (Do not round intermediate calculations.)
b. What is the value of Beta Corporation? (Do not round intermediate calculations.)
c. What is the market value of Beta Corporation's equity? (Do not round intermediate
calculations.)
d. How much will it cost to purchase 20 percent of each firm's equity? (Do not round
intermediate calculations.)
e. Assuming each firm meets its earnings estimates, what will be the dollar return to
each purchase in part (d) over the next year? (Do not round intermediate
calculations.)
Answer is not complete.
a.
Value of Alpha
$
262,500
b.
Value of Beta
$
262,500
C.
Market value of Beta's equity
$
202,000
d.
Invest in Alpha
$
52,500
Invest in Beta
$
40,400
e.
Alpha dollar return
$
14,100
Beta dollar return
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