Question
Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 14,000 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 14,000 shares of stock outstanding, currently worth $30 per share. Beta Corporation uses leverage in its capital structure. The market value of Beta's debt is $64,000, and its cost of debt is 9 percent. Each firm is expected to have earnings before interest of $74,000 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 9 percent per year.
a.What is the value of Alpha Corporation?(Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
Value of Alpha$
b.What is the value of Beta Corporation?(Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
Value of Beta$
c.What is the market value of Beta Corporation's equity?(Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
Market value of Beta's equity$
d.How much will it cost to purchase 20 percent of each firm's equity?(Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)
Amount to investAlpha$
Beta$
e.Assuming each firm meets its earnings estimates, what will be the dollar return to each position in part (d) over the next year?(Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)
Dollar return on investmentAlpha$
Beta$
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started