Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 20 million shares of stock outstanding, currently worth $38 per share. Beta Corporation uses leverage in its capital structure. The market value of Beta's debt is $350mil., and its cost of debt is 5 percent. Each firm is expected to have earnings before interest and tax of $135mil. in perpetuity. Assume that every investor can borrow at 5 percent per year. Corporate tax rate is 30%. What is the value of Beta Corporation?
Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 20 million shares of stock outstanding, currently worth $38 per share. Beta Corporation uses leverage in its capital structure. The market value of Beta's debt is $350mil., and its cost of debt is 5 percent. Each firm is expected to have earnings before interest and tax of $135mil. in perpetuity. Assume that every investor can borrow at 5 percent per year. Corporate tax rate is 30%. What is the value of Beta Corporation?
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
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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 20 million shares of
stock outstanding, currently worth $38
per share. Beta Corporation uses leverage
in its capital structure. The market value
of Beta's debt is $350mil., and its cost of
debt is 5 percent. Each firm is expected to
have earnings before interest and tax of
$135mil. in perpetuity. Assume that every
investor can borrow at 5 percent per year.
Corporate tax rate is 30%. What is the
value of Beta Corporation?
A. 1328 mil.
B. 585 mil.
C. 1018 mil
D. 865 mil.
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