Question
Firm X and Firm Y are identical in every way except their capital structure. Firm X is an allequity firm and has 15,000 shares of
Firm X and Firm Y are identical in every way except their capital structure.
Firm X is an allequity firm and has 15,000 shares of stock outstanding with a market value of $30 per share.
Firm Y uses leverage in its capital structure. The market value of Firm Y's debt is $65,000 and its cost of debt is 9%. Each firm is expected to have earnings before interest of $75,000 in perpetuity. Neither firm pays taxes.
a. What is the value of Firm X?
b. What is the value of Firm Y?
c. What is the market value of Firm Y's equity?
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Financial Management Theory And Practice
Authors: Eugene Brigham, Michael Ehrhardt, Jerome Gessaroli, Richard Nason
3rd Canadian Edition
017658305X, 978-0176583057
