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 $30 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 $101 million and costs 9 percent per year. Levered has 3.3 million shares outstanding, currently worth $115 per share. Unlevered has no debt and 5.5 million shares outstanding, currently worth $79 per share. Neither firm pays taxes. What is the value of each firm? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars (e.g.,1,234,567).) Value of Firm Unlevered $ Levered $

Explanation / Answer

Unlevered, Inc The value of Unlevered (assets = equity) =79 * 5.5million = $434.5 million Levered, Inc. Since Unlevered and Levered have the same business risk => same return on assets, the total value of Levered (equity + debt) =434.5 Million hence value of equity 434.5-101 =333.5 Undervalued Undervalued by =333.50-(379.50 ie 3.3*115) = 46 million

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.