Question C [RC1: 5 Marks] Sun Company and Moon Company are identical in every respect except that Sun is not levered. Th

[answerhappygod]

Question C Rc1 5 Marks Sun Company And Moon Company Are Identical In Every Respect Except That Sun Is Not Levered Th 1 (55.31 KiB) Viewed 77 times

Question C [RC1: 5 Marks] Sun Company and Moon Company are identical in every respect except that Sun is not levered. The market value of Moon Company's 6 percent bonds is $1.2 million. Financial information for the two firms appears here. All earnings streams are perpetuities. Neither firm pays taxes. Both firms distribute all earnings available to common stockholders immediately Projected operating income Year-end interest on debt Market value of debt Market value of stock Sun $400,000 0 0 3.600,000 Moon $400,000 72,000 1.200,000 2,532.000 Required: 1. An investor who can borrow at 6 percent per year wishes to purchase 5 percent of Moon's equity. Can he increase his dollar return by purchasing 5 percent of Sun's equity if he borrows so that the initial net costs of the two strategies are the same? (2 marks) 2. Given the two investment strategies in (a), which will investors choose? When will this process cease? (2 marks) 3. Justify your answer in details (1 mark) Answer: