Levered, Inc., and Unlevered, Inc., are identical in every way except their capital structures. Each company...

Levered, Inc., and Unlevered, Inc., are identical in every way except their capital structures. Each company expects to earn $12 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 $68 million and costs 4 percent per year. Levered has 2.6 million shares outstanding that sell for $84 per share. Unlevered has no debt and 4.3 million shares outstanding, currently worth $69 per share. Neither firm pays taxes.

What is the value of each company's equity levered? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.)

What is the value of each company's equity unlevered? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.)

Solutions

Expert Solution

The given information of the companies are as follows

Type	Levered Inc	Price per share of Levered Inc	Unlevered Inc	Price per share of Levered Inc
Equity	2,600,000 Shares	$ 84	4,300,000 Shares	$ 69
Debt	$ 68,000,000		No debt

Equity Levered is the equity which is the mixture of both the equity capital and the Debt capital, in this case only levered Inc. has debt capital of $ 68,000,000 in its total capital structure and Unleavered Inc. is comprised of only equity capital.

a) Value of each companies Equity levered capital is as follows

= Market Value of Shares + Value of Debt

Market Value of shares = No. of shares * price per share

Market Value of Shares of Levered Inc. = 2,600,000 * 84 = $ 218,400,000

Market Value of Shares of Unlevered Inc. = 4,300,000 * 69 = $ 296,700,000

Capital Structure	Levered Inc	Unlevered Inc
Value of Equity	$ 218,400,000	$ 296,700,000
Value of Debt	$ 68,000,000	$ 0
Value of Equity Leavered	$ 286,400,000	$ 296,700,000

Value of Equity Leavered of both the companies is calculated in above table.

b) Equity Unleaved is the type of capital structure, which consists of only the equity share capital and no debt. So, equity in a company which has no debt is Unleavered equity.

Value of each companies Equity Unlevered capital is as follows:

= Market Value of shares of the company

Capital Structure	Levered Inc	Unlevered Inc
Value of Equity	$ 218,400,000	$ 296,700,000
Value of Equity Unleavered	$ 218,400,000	$ 296,700,000

Value of equity Unleavered for both companies is given in above table .

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Levered, Inc., and Unlevered, Inc., are identical in every way except their capital structures. Each company...

Levered, Inc., and Unlevered, Inc., are identical in every way except their capital structures. Each company expects to earn $29.3 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 $94 million and costs 8 percent per year. Levered has 2.6 million shares outstanding, currently worth $108 per share. Unlevered has no debt and 4.8 million shares outstanding, currently worth $83 per share. Neither firm pays...

Levered, Inc. and Unlevered, Inc. are identical in every way except for their capital structures. Each...

Levered, Inc. and Unlevered, Inc. are identical in every way except for their capital structures. Each company expects to earn $29 million before interest per year in perpetuity, with each company distributing all of its earnings as dividends. Levered's perpetual debt has a market value of $91 million and costs 8 percent per year. Levered has 2.3 million shares outstanding, currently worth $105 per share. Unlevered has no debt and 4.5 million shares outstanding, currently worth $80 per share. Neither...

Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation,...

Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 14,500 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 $64,500, and its cost of debt is 8 percent. Each firm is expected to have earnings before interest of $74,500 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 8 percent...

Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation,...

Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 9,200 shares of stock outstanding, currently worth $22 per share. Beta Corporation uses leverage in its capital structure. The market value of Beta’s debt is $50,000, and its cost of debt is 13 percent. Each firm is expected to have earnings before interest of $62,000 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 13 percent...

Assume that there are two companies identical in every way except that Company A uses FIFO...

Assume that there are two companies identical in every way except that Company A uses FIFO and Company B uses the average cost method to value their inventory. If both companies visited a bank for the purpose of obtaining a loan due to rising inventory costs and the bank made its decision based on the highest net income, which company would be better positioned to obtain the loan? What if the bank made its decision based on the highest cash...

Grab Singapore is comparing two different capital structures: an unlevered firm (Plan A) and a levered...

Grab Singapore is comparing two different capital structures: an unlevered firm (Plan A) and a levered firm (Plan B). Under Plan A, the company would have total 9 million USD worth assets. On the other hand, under Plan B, Grab wants to include debt their capital structure. There would be $3 million in debt outstanding. The interest rate on the debt is 15 percent. Currently Grab SG’s shares are trading @ $30/share in the Singapore stock exchange. Assume there’s no...

Companies U and L are identical in every respect except that U is unlevered while L...

Companies U and L are identical in every respect except that U is unlevered while L has $8 million of 6% bonds outstanding. Assume: (1) All of the MM assumptions are met. (2) Both firms are subject to a 25% federal-plus-state corporate tax rate. (3) EBIT is $3 million. (4) The unlevered cost of equity is 9%. What value would MM now estimate for each firm? (Hint: Use Proposition I.) Enter your answers in millions. For example, an answer of...

Companies U and L are identical in every respect except that U is unlevered while L...

Companies U and L are identical in every respect except that U is unlevered while L has $8 million of 5% bonds outstanding. Assume that: (1) All of the MM assumptions are met. (2) Both firms are subject to a 35% federal-plus-state corporate tax rate. (3) EBIT is $2 million. (4) The unlevered cost of equity is 10%. What value would MM now estimate for each firm? (Hint: Use Proposition I.) Enter your answers in millions. For example, an answer...

Companies U and L are identical in every respect except that U is unlevered while L...

Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 6% bonds outstanding. Assume: (1) All of the MM assumptions are met. (2) Both firms are subject to a 25% federal-plus-state corporate tax rate. (3) EBIT is $5 million. (4) The unlevered cost of equity is 12%. a.) What value would MM now estimate for each firm? (Hint: Use Proposition I.) Enter your answers in millions. For example, an answer...

Companies U and L are identical in every respect except that U is unlevered while L...

Companies U and L are identical in every respect except that U is unlevered while L has $8 million of 5% bonds outstanding. Assume: (1) All of the MM assumptions are met. (2) Both firms are subject to a 25% federal-plus-state corporate tax rate. (3) EBIT is $2 million. (4) The unlevered cost of equity is 12%. What value would MM now estimate for each firm? (Hint: Use Proposition I.) Enter your answers in millions. For example, an answer of...

Subjects