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ABC and XYZ are two identical firms except for their capital structure. The share price for...

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Finance

ABC and XYZ are two identical firms except for their capitalstructure. The share price for both of firms is $10. ABC is an allequity firm. XYZ has D/E of 0.8. Investor A bought 100 shares ofXYZ with his own money since he believes the levered firm willprovide better return. If you decide to use homemade leverage toshow him that leverage doesn’t matter, what would be your tradingstrategy? Please be specific (i.e. how much money of your own willbe used, how much money you will borrow, and which firm’s share youare going to buy, etc.) Assume all assumptions hold for homemadeleverage.

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Using leverage means a person can invest in unlevered firm but by borrowing some money at some interest Suppose the caital employed of both the firms are as folows Capital Structure ABC ltd Amount XYZ ltd Amount Equity 180000 Equity 100000 Debt 80000 180000 180000 Suppose the Earning before interest and taxEBIT    See Answer
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ABC and XYZ are two identical firms except for their capitalstructure. The share price for both of firms is $10. ABC is an allequity firm. XYZ has D/E of 0.8. Investor A bought 100 shares ofXYZ with his own money since he believes the levered firm willprovide better return. If you decide to use homemade leverage toshow him that leverage doesn’t matter, what would be your tradingstrategy? Please be specific (i.e. how much money of your own willbe used, how much money you will borrow, and which firm’s share youare going to buy, etc.) Assume all assumptions hold for homemadeleverage.

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