Question
Levered, Incorporated, and Unlevered, Incorporated, are identical in every way except their capital structures. Each company expects to earn $11.8 million before interest per year
Levered, Incorporated, and Unlevered, Incorporated, are identical in every way except their capital structures. Each company expects to earn $11.8 million before interest per year in perpetuity, with each company distributing all its earnings as dividends. Levereds perpetual debt has a market value of $66 million and costs 7 percent per year. Levered has 2.4 million shares outstanding that sell for $82 per share. Unlevered has no debt and 4.1 million shares outstanding, currently worth $65 per share. Neither firm pays taxes. What is the value of each company's equity?
a) Unlevered:
b) Levered:
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