Question
Firm X and Firm Y are identical in every way except their capital structure. Firm X is an all- equity firm and has 15,000 shares
Firm X and Firm Y are identical in every way except their capital structure. Firm X is an all- equity 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 Ys 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? (3 marks) b. What is the value of Firm Y? (3 marks) c. What is the market value of Firm Ys equity? (3 marks)
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