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.)

Answer 1

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- 2x m Find & Select GS G 5 710 PV, FV, ANNUITY (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins * Cut Σ AutoSum : A Calibri 11AA = = = Dr Wrap Text General E Copy Fill 2 Paste B I U 1 - 2 - A E Merge & Center - $ % Format Painter 8. Conditional Format Cell Insert Delete Format Sort & Formatting as Table Styles 2 Clear Filter Clipboard Font Alignment Number Styles Cells Editing GQ719 1 GG GH GIG G K GL GM GN GO GP GQ GR 709 ALPHA BETA VALUE OF ALPHA CORPORATION 200000 (10000 X 20] [NO OF SHARES X PRICE] 711 712 b ACCORDING TO MM APPROACH, WHEN TAXES ARE ABSENT, LEVERED & UNLEVERED FIRM HAS SAME VALUE 713 VALUE OF BETA CORPORATION = 200000 714 715 VALUE OF BETA CORPORATION = 200000 716 LESS : MARKET VALUE OF DEBT = 60000 717 MARKET VALUE OF EQUITY 140000 718 719 d APLHA 25% X 200000 = 50000 720 BETA 25% X 140000 = 35000 721 722 ALPHA BETA 723 EBIT 70000 70000 724 INTEREST 4800 (8% X 60000) 725 EBT 70000 65200 726 727 728 729 DOLLAR RETURN TO 25% EQUITY OF ALPHA DOLLAR RETURN TO 25% EQUITY OF BETA 70000 X 25% = 65200 X 25% = 17500 16300 H N CAP STRU VALUE profit margin loan with points LOCK BOX DILUTION DOLLAR COST AVG EXPONPER APR CPI ear FVA LOAN OPTIONSpv, fv, annuity ferences pva 52 BO! 53 120% 0 Rea 1 1 + . B 9 * 10 ENG 23-11-2019