Imagine two independently owned gas stations standing next to each other and selling gas (and other goods) at about the same price, so they have the same revenues, cost structure and effective tax rate of 21%. Assume that every year they have average EBIT of $ 500,000 (I know, it's quite optimistic) without any anticipated growth. One owner finances all operations out of own pocket, while another in addition to own money also borrows $ 500,000 for five years and refinances this debt every five years without repaying principal during the time of the loan. The principal is repaid at the end by newly borrowed money (the debt is rolled over).

Discuss the difference in value (if any) of these two stations. Assume that the cash flow is relatively stable.

Answer rating: 100% (QA)

The difference in value between the two gas stations depends on the cost of debt financing and the ... View the full answer