Levered, Incorporated, and Unlevered, Incorporated, are identical in every way except their capital structures. Each company expects to earn $11.1 million before interest per year in perpetuity, with each company distributing all its earnings as dividends. Levered's perpetual debt has a market value of $59 million and costs 5 percent per year. Levered has 1.7 million shares outstanding that sell for $75 per share. Unlevered has no debt and 3.4 million shares outstanding, currently worth $58 per share. Neither firm pays taxes. What is the value of each company's equity? Levered: Unlevered:
Levered, Incorporated, and Unlevered, Incorporated, are identical in every way except their capital structures. Each company expects to earn $11.1 million before interest per year in perpetuity, with each company distributing all its earnings as dividends. Levered's perpetual debt has a market value of $59 million and costs 5 percent per year. Levered has 1.7 million shares outstanding that sell for $75 per share. Unlevered has no debt and 3.4 million shares outstanding, currently worth $58 per share. Neither firm pays taxes. What is the value of each company's equity? Levered: Unlevered:
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:Levered, Incorporated, and Unlevered, Incorporated, are identical in every way
except their capital structures. Each company expects to earn $11.1 million before
interest per year in perpetuity, with each company distributing all its earnings as
dividends. Levered's perpetual debt has a market value of $59 million and costs 5
percent per year. Levered has 1.7 million shares outstanding that sell for $75 per
share. Unlevered has no debt and 3.4 million shares outstanding, currently worth
$58 per share. Neither firm pays taxes. What is the value of each company's
equity?
Levered:
Unlevered:
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