Levered, Inc., and Unlevered, Inc., are identical in every way except their capital structures. Each company expects to earn $29.3 million before interest per year in perpetuity, with each company distributing all its earnings as dividends. Levered's perpetual debt has a market value of $94 million and costs 8 percent per year. Levered has 2.6 million shares outstanding that sell for $108 per share. Unlevered has no debt and 4.8 million shares outstanding, currently worth $83 per share. Neither firm pays taxes. What is the value of each company's equity? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e. g., 1,234,567.)

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Business

Morgan Knight

7 January, 07:52

Levered, Inc., and Unlevered, Inc., are identical in every way except their capital structures. Each company expects to earn $29.3 million before interest per year in perpetuity, with each company distributing all its earnings as dividends. Levered's perpetual debt has a market value of $94 million and costs 8 percent per year. Levered has 2.6 million shares outstanding that sell for $108 per share. Unlevered has no debt and 4.8 million shares outstanding, currently worth $83 per share. Neither firm pays taxes. What is the value of each company's equity? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e. g., 1,234,567.)

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Answers (1)

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Jovani Neal · Answer 1

Levered - $280,800,000

Unlevered - $398,400,000

Explanation:

The formula to compute the equity value is shown below:

Equity value = Number of outstanding shares * current worth per share

For Levered, the equity value would be

= 2,600,000 shares * $108

= $280,800,000

For Unlevered, the equity value would be

= 4,800,000 shares * $83

= $398,400,000

We simply multiply the number of outstanding shares with the current worth per share so that the equity value can come.