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Solnce55 [7]
3 years ago
10

Levered, Inc., and Unlevered, Inc., are identical in every way except their capital structures. Each company expects to earn $18

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 $65 million and costs 8 percent per year. Levered has 1.9 million shares of stock outstanding that sell for $98 per share. Unlevered has no debt and 3.8 million shares outstanding, currently worth $71 per share. Neither firm pays taxes. Suppose you were considering purchasing stock in one of these companies.
Required:
Which firm's equity shares represent a better value? Equity shares in the unlevered firm are the better buy?
Business
1 answer:
Fantom [35]3 years ago
5 0

Answer:

Levered, Inc. and Unlevered, Inc.

Equity shares in the Levered, Inc. represents a better value.

Explanation:

a) Data and Calculations:

                                          Levered, Inc.      Unlevered, Inc.

Debts at 8%                        65 million          $0

Outstanding shares           1.9 million          3.8 million

Market price per share     $98                    $71

Equity value                       $186.2 million    $269.8 million

Expected EBIT                   $18 million          $18 million

Interest ($65 million * 8%) $5.2 million       $0

Net income                        $12.8 million      $18 million

Earnings per share           $6.74                  $4.74

Dividends per share         $6.74                  $4.74

b) The value of the equity shares in the Levered Inc. would have increased more if both firms pay taxes because of the tax advantage gained by deducting interest expense from the earnings before taxes.  This shows that financial leverage increases the value of equity shares.

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alisha [4.7K]

Answer:

B) Supply of foreign currencies and a supply of dollars in the foreign exchange markets

Explanation: just search it up they don't demand for foreign currencies they supply of foreign currencies

5 0
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What is price and explain factors that influencing price. Give at least 5 factors and explain them.
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7 0
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Suppose that the federal administration plans to fight a deep, ongoing recession with a nationwide plan of increasing infrastruc
defon

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Explanation:

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When the government spends on infrastructural development such as the scenario described in the text, they are engaging in a form of spending known as Government Investment. This will increase the amount of G in the aggregate demand model.

4 0
3 years ago
In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billio
Masteriza [31]

Answer:

The correct answer is A. increase tax rates and/or reduce government spending.

Explanation:

Increasing the tax burden is an easy way for the state to increase its income temporarily and subject matter, but it turns out that increasing the tax burden affects productivity and consumption, so in the end the income of the productive sector is diminished, and more taxes on a lower taxable base does not imply increasing revenues.

When a government decides to reduce public spending for a fiscal balance, it is limited to reducing the social assistance and social security, but not to reduce the bureaucratic apparatus that curiously is usually high in countries with economic crisis, and also Be a source of corruption corruption.

7 0
3 years ago
A Co. showed the following values for its inventory as of the end of its fiscal year: Historical cost $100,000 Current replaceme
Levart [38]

Answer:

$90,000

Explanation:

The reason is that the International Accounting standard IAS 3 Inventories says that the asset must be reported at lower of:

Cost &

Net realizable value

Here the cost is $100,000 and NRV is $90,000, which means that the inventory must be reported at $90,000 which is the lower value.

4 0
3 years ago
Read 2 more answers
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