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Alex and brock are professional financial analysts

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Alex and Brock are professional financial analysts, and they are good friends. Alex is working at Tarko Inc., and Brock is working for Greengrow Inc. They know that the capital markets are perfectly competitive, and the corporate tax rate is Tc. They also know that the cost of Financial distress is zero. Currently, both firms, Tarko Inc., and Greengrow Inc. are debt-free and have the same value. Alex and Brock are considering issuing debt and raising the financial leverage of their companies. Does Tarko Inc. with twice financial leverage of Greengrow Inc. have twice the value?

Alex believes on the above statement, but Brock disagrees with it.

Who is right and why? Show the detailed calculation.

Reference no: EM132679309

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