Identical in every way except their capital structures

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Reference no: EM131528533

Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 10,400 shares of stock outstanding, currently worth $25 per share. Beta Corporation uses leverage in its capital structure. The market value of Beta’s debt is $52,000, and its cost of debt is 11 percent. Each firm is expected to have earnings before interest of $56,000 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 11 percent per year.

Requirement 1:

What is the value of Alpha Corporation? (Do not include the dollar sign ($).)

Value of Alpha $

Requirement 2:

What is the value of Beta Corporation? (Do not include the dollar sign ($).)

Value of Beta $

Requirement 3:

What is the market value of Beta Corporation’s equity? (Do not include the dollar sign ($).)

Value of Beta’s equity $

Requirement 4:

How much will it cost to purchase 16 percent of each firm’s equity? (Do not include the dollar signs ($).)

Cost for Alpha $

Cost for Beta $

Requirement 5:

Assuming each firm meets its earnings estimates, what will be the dollar return to each position in requirement 4 over the next year? (Do not include the dollar signs ($). Round your answers to the nearest whole dollar amount. (e.g., 32))

Return on Alpha $

Return on Beta $

Reference no: EM131528533

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