Levered plc and Unlevered plc are identical in every way except their capital structures. Each company expects
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Levered plc and Unlevered plc are identical in every way except their capital structures. Each company expects to earn £96 million before interest per year in perpetuity, with each company distributing all its earnings as dividends. Levered’s perpetual debt has a market value of £275 million and costs 8 per cent per year. Levered has 4.5 million shares outstanding, currently worth £100 per share. Unlevered has no debt and 10 million shares outstanding, currently worth £80 per share. Neither firm pays taxes. Is Levered’s equity a better buy than Unlevered’s equity?
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Corporate Finance
ISBN: 9780077173630
3rd Edition
Authors: David Hillier, Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan, Jeffrey F. Jaffe
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