Identical in every way except their capital structures

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Reference no: EM13913138

Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 15,000 shares of stock outstanding, currently worth $30 per share. Beta Corporation uses leverage in its capital structure. The market value of Beta’s debt is $65,000, and its cost of debt is 9 percent. Each firm is expected to have earnings before interest of $75,000 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 9 percent per year. What is the value of Alpha Corporation? What is the Value of Beta Corporation? What is the value of Beta's equity? How much will it cost to purchase 20 % of each company? Assuming each firm meets earnings estimates, what will the dollar return be to each with 20% equity ownership over the next year?

Reference no: EM13913138

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