Question: Firm A and Firm B are identical in all respects except for their capital structure. Firm A is all equity financed with dollar 800,000 in stock. Firm B uses both stock & perpetual debt; its stock is worth dollar 400,000 & the interest rate on its debt is 10%. Both firms expect EBIT to be dollar 90,000. Ignore all taxes.
Show how you could create exactly the same cash flows & rate of return by investing in Firm A & using homemade leverage.