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

question 49

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.After seeing Steve's analysis,Mike tells Steve that while his analysis looks good on paper,Steve will never be able to borrow at 8%,but would have to pay a more realistic rate of 12%.If Mike is right,what will Steve's payout be?

---

Definitions:

Psychotherapy Effectiveness

The degree to which psychotherapy leads to desired changes or improvements in mental health and well-being.

Placebo Effects

The phenomenon where an individual experiences a perceived improvement in health or well-being after receiving a treatment with no therapeutic value, attributed to the individual's belief in the effectiveness of the treatment.

Controlled Studies

Scientific studies that involve direct comparison between experimental groups and control groups to determine the effect of a variable.

Disorder

A condition characterized by disruption to normal functioning, often referring to mental health or physical health issues.