Question
Please help/double check what I calculated. My solution for D seems off. There are two firms, Beautiful Widgets (BW) and Glamorous Thingamajigs (GT). Each has
Please help/double check what I calculated. My solution for "D" seems off.
There are two firms, Beautiful Widgets (BW) and Glamorous Thingamajigs (GT). Each has expected Net Operating Income (NOI) of $5 million each year forever, and the NOI to BW will always be exactly the same as that to GT, whether it ends up above or below the expected amount. After any interest payments, all income is paid out to equity holders. BW is all equity (stock). GT has some equity, along with $20 million (market value and face value) in perpetual debt. GTs debt pays risk-free 6% interest each year, while BW has expected return on its equity of 3.3%. There are no taxes, and the rest of the Modigliani-Miller assumptions hold.
a. What is the value of BW equity? ($151,515,151,52)
b. What is the value of GT equity? ($115,151,515.15)
c. What is the expected cash flow to GT equity holders each year?
d. What is the expected return on GT stock? (0.47%)
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