Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation,...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 16,000 shares of stock outstanding, currently worth $20 per share. Beta Corporation uses leverage in its capital structure. The market value of Beta's debt is $66,000 and its cost of debt is 8 percent. Each firm is expected to have earnings before interest of $76,000 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 8 percent per year. a. What is the value of Alpha Corporation? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) b. What is the value of Beta Corporation? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) c. What is the market value of Beta Corporation's equity? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) d. How much will it cost to purchase 25 percent of each firm's equity? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) e. Assuming each firm meets its earnings estimates, what will be the dollar return to each position in part (d) over the next year? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) a. Value of Alpha b. Value of Beta C. Market value of Beta's equity d. Alpha Beta e. Alpha Beta Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 16,000 shares of stock outstanding, currently worth $20 per share. Beta Corporation uses leverage in its capital structure. The market value of Beta's debt is $66,000 and its cost of debt is 8 percent. Each firm is expected to have earnings before interest of $76,000 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 8 percent per year. a. What is the value of Alpha Corporation? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) b. What is the value of Beta Corporation? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) c. What is the market value of Beta Corporation's equity? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) d. How much will it cost to purchase 25 percent of each firm's equity? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) e. Assuming each firm meets its earnings estimates, what will be the dollar return to each position in part (d) over the next year? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) a. Value of Alpha b. Value of Beta C. Market value of Beta's equity d. Alpha Beta e. Alpha Beta
Expert Answer:
Answer rating: 100% (QA)
a Value of Alpha corp 1600020 b when there is no taxes as per Modigliani Miller Propositi... View the full answer
Related Book For
Corporate Finance Core Principles And Applications
ISBN: 9781260571127
6th Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan
Posted Date:
Students also viewed these general management questions
-
Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 21,000 shares of stock outstanding, currently worth $23...
-
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...
-
Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 18,000 shares of stock outstanding, currently worth $35...
-
Brandon Stroud was driving a golf car made by Textron, Inc., to transport guests at Christmas party. The golf car did not have lights, but Textron did not warn against using it on public roads at...
-
Barnum Distributors wants a projection of cash receipts and cash payments for the month of November. On November 28, a note will be payable in the amount of $98,500, including interest. The cash...
-
Larry Henley received Lot 6-A in Soldotna, Alaska, as a gift in 2001. The parcel was a treed lot with no improvements. Lot 6-B was adjacent and directly south of Lot 6-A. Later that year, Henley...
-
What roles do supernatural beings and powers play in religion?
-
Sky View Aerial Photography offers a wide range of aerial photographic, video, and infrared imaging services. The company has grown from its early days of snapping pictures of client houses to its...
-
3. Evaluate .3 Xx dx. x2 9 Hint: Try the problem twice: Once with trigonometric substitution, and a second time try substituting u = x-9. This trick would also work on dx, but would not work on 9 x2...
-
Tom Scott is the owner, president, and primary salesperson for Scott Manufacturing. Because of this, the companys profits are driven by the amount of work Tom does. If he works 40 hours each week,...
-
Distinguish among quality planning, quality assurance, and quality control and improvement.
-
Identify five symptoms, each pertaining to a management decision problem, and a plausible cause for each one.
-
Discuss the role of social media in enabling the researcher to define the marketing research problem and in developing an approach.
-
Adidas, ranked after Nike in the global market for athletic footwear, wants to conduct marketing research to find out how to increase its market share. Conduct research online to identify the...
-
You are conducting a marketing research project for Starbucks Coffee. Research online to determine the main factors affecting consumer preference for certain coffee brands. Also, determine the...
-
Select an industry of your choice. Using secondary sources, obtain industry sales and the sales of the major firms in that industry for the past year. Estimate the market shares of each major firm....
-
Carla Vista Inc.'s books revealed the following data at year end after all adjustments were made: Cash sales Sales returns (on credit sales) Allowance for expected credit losses (credit balance)...
-
Answer the following two independent questions. a. MM Corporation is considering several proposed investments for the coming budget year. MM produces electrical apparatus for industrial complexes....
-
Perkins, Inc., is considering an investment of $730,000 in an asset with an economic life of five years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first...
-
Layton Corp. has a $2,000 par value bond outstanding with a coupon rate of 4.6 percent paid semiannually and 13 years to maturity. The yield to maturity of the bond is 3.8 percent. What is the dollar...
-
Suppose the spot and six-month forward rates on the Norwegian krone are Kr 8.53 and Kr 8.61, respectively. The annual risk-free rate in the United States is 3.2 percent, and the annual risk-free rate...
-
Show that the process in equation (5.110), \(x_{t}=-\sum_{j=0}^{\infty} \phi_{1}^{-j} w_{t+j}\) where \(\left|\phi_{1} ight| <1\), is stationary. Note an important property: in this representation...
-
(a) Suppose \(\left\{w_{t} ight\}\) is a white noise with constant variance \(\sigma_{w}^{2}\). What is the variance of the process \(\left\{\triangle\left(w_{t} ight) ight\}\) ? Why is this so? (b)...
-
Suppose that \(\left\{x_{t} ight\}\) is an \(\mathrm{I}(d)\) process for \(d>k\), for some integer \(k>1\). (a) Show that \(\left\{x_{t} ight\}\) is an \(\mathrm{I}(d+k)\) process (b) Show that...
Study smarter with the SolutionInn App