Explain leverage analysis of capital budgeting decisions

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Explain Leverage analysis of capital budgeting decisions

Firm A and Firm B are identical in all respects except for their capital structure. Firm A is all equity financed with $800,000 in stock. Firm B uses both stock and perpetual debt; its stock is worth $400,000 and the interest rate on its debt is 10 percent. Both firms expect EBIT to be $90,000. Ignore taxes.

Show how you could generate exactly the same cash flows and rate of return by investing in Firm A and using homemade leverage.

Reference no: EM1313921

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