Firm U is an all equity firm and has a market value of $100,000 and EBIT of $300,000. Firm L has identical EBIT but it uses 40% debt in its capital structure. Firm L pays total annual interest of $3000 on its debt. Both firms satisfy the MM assumptions. Taxes are absent. b) Ryan is the holder of $9,000 worth of L’s stock with earnings of $4455; a matching ROI of 49.5%, assuming a dividend pay-out of 100%. Using homemade leverage, show how Ryan could generate exactly the same cash flows and rate of return by investing in Firm U. SHOW ALL WORKINGS -
Firm U is an all equity firm and has a market value of $100,000 and EBIT of $300,000. Firm L has identical EBIT but it uses 40% debt in its capital structure. Firm L pays total annual interest of $3000 on its debt. Both firms satisfy the MM assumptions. Taxes are absent. b) Ryan is the holder of $9,000 worth of L’s stock with earnings of $4455; a matching ROI of 49.5%, assuming a dividend pay-out of 100%. Using homemade leverage, show how Ryan could generate exactly the same cash flows and rate of return by investing in Firm U. SHOW ALL WORKINGS -
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Firm U is an all equity firm and has a market value of $100,000 and EBIT of
$300,000. Firm L has identical EBIT but it uses 40% debt in its capital
structure. Firm L pays total annual interest of $3000 on its debt. Both
firms satisfy the MM assumptions. Taxes are absent.
b)
Ryan is the holder of $9,000 worth of L’s stock with earnings of $4455; a matching
cash flows and
SHOW ALL WORKINGS -
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