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:

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter13: Capital Structure Concepts

Section: Chapter Questions

Problem 8P

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