Firms A and B are identical except for their capital structure. A carries no debt,...
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Firms A and B are identical except for their capital structure. A carries no debt, whereas B carries 300m of debt on which it pays a 5% interest rate. Assume no transaction costs, no taxes and risk-free debt. The relevant numbers are provided in the following table (in m):
A B
Value of Firm 400 500
Debt 0 300
Equity Earnings before interest 50 50
Interest payment
Interest rate Not Applicable 5%
Earnings after interest
Return on Equity
Debt/Equity Ratio
Cost of Capital a. Reproduce the above table in your answer booklet filling the blank spaces. Explain your calculations. b. Consider an investor holding a stake y, with 0
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