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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
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