Produce the identical cash flows for flowers

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Reference no: EM131522651

Company E is finance with 30% debt and 70 equity wilhe company O is finance with 100% equity. The firms are alike in all but their capital structure and they can borrow at the risk free rate which is 10%. Flowers owns 1% of the common stock of company E. What other package (Investment in Company O) would produce the identical cash flows for Flowers? Show all of your work and also show that the cash flows for the investments strategies are the same. Note that you are purchasing the stock of the less-levered firm and then further leveraging uo in the investment yourself. Assume that the total value of E is 100$ and is composed of 30$ of debt (at 10% interest) and 0$ of equity (Which requires a 20% return). This will coincide with interest expense of 3$ per year for E and earnings to equity holders of 14$ per year. Similary, assume that O is composed of 0$ of debt and 100$of equity. (17% required rate of retun for equity)

Reference no: EM131522651

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