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Describre Capital Budgeting decision based on the capital structure

Firm A and Firm B are identical in all respects except for their capital structure. Firm A is all equity financed with $800,000 in stock. Firm B uses both stock and perpetual debt; its stock is worth $400,000 and the interest rate on its debt is 10 percent. Both firms expect EBIT to be $90,000. Ignore taxes.

If you own $30,000 of Firm B stock, what (1) rate of return and (2) cash flows can you expect?

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M9164291

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