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How can he use homemade leverage

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Question - Companies A and B are identical in all aspects with same earnings of $ 1000 each, their total assets worth $ 5000 each, but differ only in their capital structure. A is financed 30% by debt and 70% by equity. B is financed 10% debt and 90% equity. The debt of both companies is 10%.

Required -

a. Jon owns 1% common stock (equity) of A. How can he use homemade leverage using B to replicate his current earnings in A?

b. If Jon owned 2% common stock of B, how can he use homemade leverage using A to replicate his earnings in B?

Reference no: EM133026956

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