Question
Companies A and B, are identical except their capital structures. Both expects to earn 100 million EBIT per year in perpetuity, all earnings will be
Companies A and B, are identical except their capital structures. Both expects to earn 100 million EBIT per year in perpetuity, all earnings will be distributed as dividends.
Company A perpetual debt has a market value of 90 million and costs 12 percent per year.
Company A has 3 million shares outstanding, currently worth 50 per share.
Company B has no debt and 3 million shares outstanding, at a market price of 60 per share.
If you have to buy stocks from A or B, which one would you choose and why?
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Financial management theory and practice
Authors: Eugene F. Brigham and Michael C. Ehrhardt
12th Edition
978-0030243998, 30243998, 324422695, 978-0324422696
