Newtone Company and Oldtone Company are identical in every way except their capital structures.
Newtone, an all equity firm has 5,000 shares of stock outstanding: each share sell for $20.
Oldton uses leverage in its capital structure. The market value of Oldtone’s debt is $25,000, and the cost of debt is 12%. Each firm is expected to have earnings before interest of $350,000. Neither firm pays taxes. What is the value of Netone stock? What is the value of Oldtone stock?