Question

Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 10,000 shares of stock outstanding, currently worth $20 per share. Beta Corporation uses leverage in its capital structure The market value of Beta's debt is $60,000 and its cost of debt is 8 percent. Each firm is expected to have earnings before interest of $70,000 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 8 percent per year. a. What is the value of Alpha Corporation? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) b. What is the value of Beta Corporation? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) c. What is the market value of Beta Corporation's equity? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) d. How much will it cost to purchase 25 percent of each firm's equity? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) e. Assuming each firm meets its earnings estimates, what will be the dollar return to each position in part (d) over the next year? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) a. Value of Alpha b. Value of Beta Market value of Beta's equity d. Alpha c. Beta e. Alpha Beta

Answer 1

Answering first 4 questions as per policy , kindly re-post the remaining

		Alpha		Beta
	Debt	0		60000
	Interest	0		4800	60000*8%
	Number of shares Outstanding	10000		10000
	worth per share	20
	Earning	70,000		70,000
	Less Interest	0		-4800
	Net Earning	70,000		65200	70000-4800
	Risk free rate	8%		8%
Answer A/B)	Value of firm	875000	70000/8%	815000	65200/8%
	Value of equity	875000	Answer C)	755000	815000-60000
Answer D)	Cost to purchase 25% of equity	218750	25%*875000	188750	25%*755000