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Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 14,500 shares of stock outstanding,
Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 14,500 shares of stock outstanding, currently worth $20 per share. Beta Corporation uses leverage in its capital structure. The market value of Betas debt is $64,500 and its cost of debt is 8 percent. Each firm is expected to have earnings before interest of $74,500 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 8 percent
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