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 $