Imagine two independently owned gas stations standing next to each other and selling gas (and other goods) at about the same price, so they have the same revenues, cost structure and effective tax rate of 35%. Assume that every year they have average EBIT of $ 500,000 (I know, it's quite optimistic) without any anticipated growth. One owner finances all operations out of own pocket, while another borrows $ 500,000 for five years at 5% interest and refinances this debt every five years without repaying principal (note that this does not mean that the leveraged station has 100% debt). The required return of equity for both gas stations is 10%.

Discuss the difference in value (if any) of these two stations.

Note: I've added the cost of the debt and the required return on equity to this scenario.