1.You received a call from the CEO of Able Group, one of your largest clients.He indicated that he is looking to invest in 1 of 2 companies.Each company requires capital in the amount of $10 million and is expected to yield earnings of $1 million per year, all of which will be distributed annually.Company A requires 100% shareholder funding while Company B requires 50% shareholder funding as a creditor is willing to provide 50% of the capital required to operate the business.

The cost of equity capital for Company A and B is 9% and 10%, respectively.The interest rate for the debt capital offered by the creditor for Company B is 6%.

The CEO wanted your opinion as to whether the value of Company A and B would be impacted by the cost of the related capital and if so, which company would yield a higher valuation.Indicate how you would respond, explaining the rationale for your assertions.