Levered and Unlevered are two companies with identical business risk. Their earnings are perfectly correlated.

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1.             Levered and Unlevered are two companies with identical business risk. Their earnings are perfectly correlated. Each company is expected to earn $96M per year in perpetuity and they distribute all of their earnings. Levered's debt has a market value of $275M and yields 8%. Levered stock sells at $100/share and there are 4.5M shares outstanding. Unlevered has 10M shares outstanding with a price of $80 per share. Unlevered has no debt. There are no taxes. Which stock is a better investment? (prove it )

Question

Levered and Unlevered are two companies with identical business risk. Their earnings are perfectly correlated.

  • Written in: 17-Oct-2019
  • Paper ID: 382255
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DATE ANSWERED

Oct 17, 2019

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