Nadus Corporation and Logis Corporation are identical in every way except their capital structures. Nadus Corporation, an

Question:

Nadus Corporation and Logis Corporation are identical in every way except their capital structures. Nadus Corporation, an all-equity firm, has 5,000 shares of stock outstanding;

each share sells for $$20.$ Logis Corporation uses leverage in its capital structure. The market value of Logis Corporation’s debt is $$25,000.$ Logis’s cost of debt is 12 percent. Each firm is expected to have earnings before interest of $$350,000.$ Neither firm pays taxes.

Suppose you want to purchase the same portion of the equity of each firm. Assume you can borrow money at 12 percent.

a. What is the value of Nadus’s stock?

b. What is the value of Logis’s stock?

c. What will your costs and returns be if you buy 20 percent of each firm’s equity?

d. Which investment is riskier? Why?

e. Construct an investment strategy for Nadus stock that replicates the investment returns of Logis stock.

f. What is the value of Logis Corporation?

g. If the value of Logis’s assets is $$135,000$ and you can invest in up to 20 percent of the Logis stock, what should you do?

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Asim farooq

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