question archive Consider two firms: ABC: an all equity firm
Consider two firms: ABC: an all equity firm
Subject:FinancePrice:2.87 Bought7
Consider two firms: ABC: an all equity firm. It has 9 million common shares outstanding, worth $40/share. XYZ: is a levered firm with 4.6 million shares at $52.50/share. Its perpetual debt has a market value of $91 million and costs 8% a year. They are identical in every other way. Both firms expect to earn $29 million before interest/year in perpetuity, with each company distributing all earnings as dividends. Neither pay taxes. Assume the debt of XYZ is correctly priced. Which stock is a better buy? Show your work.
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