Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 10,500 shares of stock outstanding, currently worth $25 per share. Beta Corporation uses leverage in its capital structure. The market value of Beta's debt is $60,500, and its cost of debt is 7 percent. Each firm is expected to have earnings before interest of $70,500 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 7 percent per year. a. What is the value of Alpha Corporation? (Do not round intermediate calculations.) b. What is the value of Beta Corporation? (Do not round intermediate calculations.) c. What is the market value of Beta Corporation's equity? (Do not round intermediate calculations.) d. How much will it cost to purchase 20 percent of each firm's equity? (Do not round intermediate calculations.) e. Assuming each firm meets its earnings estimates, what will be the dollar return to each purchase in part (d) over the next year? (Do not round intermediate calculations.) Answer is not complete. a. Value of Alpha $ 262,500 b. Value of Beta $ 262,500 C. Market value of Beta's equity $ 202,000 d. Invest in Alpha $ 52,500 Invest in Beta $ 40,400 e. Alpha dollar return $ 14,100 Beta dollar return

Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 10,500 shares of stock outstanding, currently worth $25 per share. Beta Corporation uses leverage in its capital structure. The market value of Beta's debt is $60,500, and its cost of debt is 7 percent. Each firm is expected to have earnings before interest of $70,500 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 7 percent per year. a. What is the value of Alpha Corporation? (Do not round intermediate calculations.) b. What is the value of Beta Corporation? (Do not round intermediate calculations.) c. What is the market value of Beta Corporation's equity? (Do not round intermediate calculations.) d. How much will it cost to purchase 20 percent of each firm's equity? (Do not round intermediate calculations.) e. Assuming each firm meets its earnings estimates, what will be the dollar return to each purchase in part (d) over the next year? (Do not round intermediate calculations.) Answer is not complete. a. Value of Alpha $ 262,500 b. Value of Beta $ 262,500 C. Market value of Beta's equity $ 202,000 d. Invest in Alpha $ 52,500 Invest in Beta $ 40,400 e. Alpha dollar return $ 14,100 Beta dollar return

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter20: Financing With Derivatives

Section: Chapter Questions

Problem 8P

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