Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all equity firm, has 15,000 shares of stock outstanding, currently worth GH¢ 30 per share. Beta Corporation uses leverage in its capital structure. The market value of Beta’s debt is GH¢ 65,000 and its cost of debt is 9 percent. Each firm is expected to have earnings before interest of GH¢ 75,000 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 9 percent per year. What is the value of Alpha Corporation? What is the value of Beta Corporation? What is the market value of Beta Corporation’s equity?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all equity firm, has 15,000 shares of stock outstanding, currently worth GH¢ 30 per share. Beta Corporation uses leverage in its capital structure. The market value of Beta’s debt is GH¢ 65,000 and its cost of debt is 9 percent. Each firm is expected to have earnings before interest of GH¢ 75,000 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 9 percent per year.

  1. What is the value of Alpha Corporation?
  2. What is the value of Beta Corporation?
  3. What is the market value of Beta Corporation’s equity?
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