Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 9,700 shares of stock outstanding, currently worth $22 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 15 percent. Each firm is expected to have earnings before interest of $51,000 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 15 percent per year.
Requirement 1: What is the value of Alpha Corporation? (Do not include the dollar sign ($).) 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 15 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 $