2. The Kelly Company and the Green Company are identical in every respect except that the Kelly...
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2. The Kelly Company and the Green Company are identical in every respect except that the Kelly Company is not levered, while the Green Company has
$2 million in 12 percent bonds outstanding. There are no taxes, and capital markets are assumed to be perfect. The valuation of the two firms is the following:
Kelly Green Net operating income $ 600,000 $600,000 Interest on debt Earnings to common Required equity rate Market value of stock Market value of debt 0 2,000,000 Total value of firm 4,000,000 4,250,000 Implied overall capitalization rate, k, 15.00% 14.12%
Debt-to-equity ratio, B/S 0 .89
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