Question
ABC Ltd and FG Pty Ltd are identical firms in every way except for their capital structure (FG Pty Ltd uses perpetual debt). The EBIT
- ABC Ltd and FG Pty Ltd are identical firms in every way except for their capital structure (FG Pty Ltd uses perpetual debt).
The EBIT for both companies is expected to be $20 million forever. The shares of ABC Ltd are worth $100 million, and the shares of FG Pty Ltd are worth $50 million. The interest rate is 5 per cent. Rowen owns $2 million of FG Pty Ltds shares. Please answer the following questions, ignoring taxes.
a) What is rate of return for FG Pty Ltd? Show how Rowen could generate the same cash flow and rate of return by investing in ABC Ltd and using home-made leverage.
b) What is the cost of capital for both companies? What principle does your answer illustrate?
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Money School Become Financially Independent And Reclaim Your Life
Authors: Lacey Filipich
1st Edition
1760890227, 978-1760890223
