Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 7,000 shares of stock outstanding, currently worth $23 per share. Beta Corporation uses leverage in its capital structure. The market value of Beta's debt is $38, 000, and its cost of debt is 9 percent. Each firm is expected to have earnings before interest of $32,000 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 9 percent per year. What is the market value of Beta Corporation's equity?
Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 7,000 shares of stock outstanding, currently worth $23 per share. Beta Corporation uses leverage in its capital structure. The market value of Beta's debt is $38, 000, and its cost of debt is 9 percent. Each firm is expected to have earnings before interest of $32,000 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 9 percent per year. What is the market value of Beta Corporation's equity?
Chapter12: Capital Structure
Section: Chapter Questions
Problem 4PROB
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