Levered and Unlevered are two companies with identical business risk. Their earnings are perfectly correlated. Each company is expected to earn $96M per year in perpetuity and they distribute all of their earnings. Levered's debt has a market value of $275M and yields 8%. Levered stock sells at $100/share and there are 4.5M shares outstanding. Unlevered has 10M shares outstanding with a price of $80 per share. Unlevered has no debt. There are no taxes. Which stock is a better investment?
Decision: The levered firm's equity is undervalued as its... View the full answer