Unl Inc and Lev Corp are identical in every way, except for their capital structure. Unl Inc. is an all equity firm, un-levered, with 100,000 shares outstanding currently trading at $40 per share. Lev has $1,000,000 debt paying 6% annual interest, it has 100,000 shares outstanding. Anyone, corporation or individuals can borrow or lend freely at the same 6% rate. Both companies EBIT is $300,000. There are no taxes.

a. What is the value of Unl Inc.?

b. What is the value of Lev Corp?

c. What is Lev equity value? And price per share?

d. An investor currently own 10% of Unl equity. What is his holding $ value.

e. The investor would like to sell his Unl holding and buy 10% of Lev Corp equity. How much does he need to borrow or lend?

f. Both companies payout all their EBT as dividend (no taxes, Lev has to pay interest). What was the investor income if had had stayed with Unl shares? What is his income in his new Lev portfolio (remember he has to pay interest)?

Answer rating: 100% (QA)

a The value of Unl Inc can be calculated by multiplying the number of outstanding shares by the priceshare Given that Unl Inc has 100000 shares priced ... View the full answer