Consider Two Firms,U and L,both with $50,000 in Assets

question 70

Essay

Consider two firms,U and L,both with $50,000 in assets. Firm U is unlevered,and firm L has $20,000 of debt that pays 8% interest. Firm U has 1,000 shares outstanding,while firm L has 600 shares outstanding. Mike owns 20% of firm L and believes that leverage works in his favor. Steve tells Mike that this is an illusion,and that with the possibility of borrowing on his own account at 8% interest,he can replicate Mike's payout from firm L.
Given a level of operating income of $2,500,show the specific strategy that Mike has in mind.

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Definitions:

Demand

The total amount of goods and services that consumers are willing and able to purchase at various price levels, at a given moment in time.

Farm Incomes

The earnings obtained from agricultural activities, reflecting the financial health and productivity of farms.

Proportionate Increases

Situations where variables increase by the same percentage, maintaining their relative proportion to one another.

Demand

The quantity of a good or service that consumers are willing and able to purchase at various prices during a specified time period.