Levered, Inc., and Unlevered, Inc., are identical in every way except their capi

Question

Levered, Inc., and Unlevered, Inc., are identical in every way except their capital structures. Each company expects to earn $28.9 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 S90 million and costs 7 percent per year. Levered has 2.2 million shares outstanding, currently worth $116 per share. Unlevered has no debt and 4.4 million shares outstanding, currently worth $78 per share. Neither firm pays taxes. What is the value of each company's equity? (Enter your answers in dollars, not millions of dollars, e.g., 1, 234,567. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

Explanation / Answer

Unlevered :Value of equity = 4,400,000 * 78 = $ 343,200,000

Levered :Cost of equity = 2,200,000 *116 =$ 255,200,000

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