15.4 Levered, Inc., and Unlevered, Inc., are identical companies with identical business risk.

Their earnings are perfectly correlated. Each company is expected to earn $96 million per year in perpetuity, and each company distributes all its earnings. Levered’s debt has a market value of $275 million and provides a return of 8 percent. Levered’s stock sells for

$100 per share, and there are 4.5 million outstanding shares. Unlevered has only 10 million outstanding shares worth $80 each. Unlevered has no debt. There are no taxes.

Which stock is a better investment?