25 MM Proposition I Levered plc and Unlevered plc are identical in every way except their capital structures.

Each company expects to earn £96 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 £275 million and costs 8 per cent per year. Levered has 4.5 million shares outstanding, currently worth £100 per share.

Unlevered has no debt and 10 million shares outstanding, currently worth £80 per share. Neither firm pays taxes. Is Levered’s equity a better buy than Unlevered’s equity?