Question
You are asked to analyze two companies, DCoin Inc. and ECoin, Inc., both of which produce the same menu of products, i.e., they have identical
You are asked to analyze two companies, DCoin Inc. and ECoin, Inc., both of which produce the same menu of products, i.e., they have identical assets. Both companies have a total market value of $100 million but DCoin is financed entirely by common stock while ECoin is financed by debt and common stock. Having well-informed contacts in the market, you know that well-diversified investors require an expected rate of return of 17 percent on DCoins stock and 35 percent on ECoins stock to adequately compensate them for risk. You also know that the expected rate of return on the market portfolio is 8 percent and the risk-free rate is 4 percent. Assume all taxes are zero.
Question: Assuming that ECoins debt is riskless, what is the total market value of its debt outstanding?
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