Two firms, Unleveraged, Inc. and Leveraged, Inc. both have $50,000 in assets. Unleveraged has no long-term debt and Leveraged has $20,000 of debt that pays 8% interest. Unleveraged has 1,000 shares outstanding, while Leveraged has 600 shares outstanding. Mike owns 20% of Leveraged and believes that leverage works in his favor. Steve tells Mike that this is an illusion, and that with the possibility of borrowing on his own account at 8% interest, he can replicate Mike’s payout from firm Leveraged

Answer rating: 100% (QA)

Interest expense for L interest rate x debt 8 x 20000 16... View the full answer