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Alpha and Beta Corp. are identical in every way except their capital structures. Alpha Corp. an...

Alpha and Beta Corp. are identical in every way except their capital structures. Alpha Corp. an all equity firm, has 13,000 shares of stock outstanding, currently worth $20 per share. Beta Corp. uses leverage in its capital structure. The market value of Beta's debt is $63,000 and its cost of debt is 8%. Each firm is expected to have earnings before interest of $73,000 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 8% per year.

How much will cost to purchase 25% of each firms equty(d)? & Assuming each firm meets its earnings estimates, what will be the dollar return to each position in part(d) over the year?

e

Alpha

Beta
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