Question
Levered, Inc., and Unlevered, Inc., are identical in every way except their capital structures. Each company expects to earn $18 million before interest per year
Levered, Inc., and Unlevered, Inc., are identical in every way except their capital structures. Each company expects to earn $18 million before interest per year in perpetuity, with each company distributing all its earnings as dividends. Levereds perpetual debt has a market value of $65 million and costs 8 percent per year. Levered has 1.9 million shares outstanding that sell for $98 per share. Unlevered has no debt and 3.8 million shares outstanding, currently worth $71 per share. Neither firm pays taxes.
Is Levered's stock a better buy than Unlevered's stock?
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