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Consider the situation with no taxes and no distress costs. Firm A has no debt, and Firm B has debt of $5,000 with interest rate
Consider the situation with no taxes and no distress costs. Firm A has no debt, and Firm B has debt of $5,000 with interest rate 9%. Both companies have identical projects that generate free cash flows of $1,000 or $1,300 with equal probability each year. After paying any interest on debt, both companies use all remaining free cash flows to pay dividends each year. Consider the following two strategies: (1) Hold 10% of the equity of Firm B (2) Hold x% of the equity of Firm A and borrow $y at interest rate 9% What's the value of y such that two strategies provide the same cash flows? (If your answer is $12,345, type 12,345. Round your answer to 0 decimal places)
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