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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 12,500 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 12,500 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 $62,500, and its cost of debt is 9 percent. Each firm is expected to have earnings before interest of $72,500 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 9 percent per year
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