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?

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The Answer of 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?

Consider Two ﬁRms, U and L, Both with €50,000 in Assets.Firm