9. Homemade Leverage and WACC [LO1] ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all-equity financed with $720,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $360,000 and the interest rate on its debt is 7 percent. Both firms expect EBIT to be $73,000. Ignore taxes. a. Rico owns $43,500 worth of XYZ's stock. What rate of return is he expecting? b. Show how Rico could generate exactly the same cash flows and rate of return by investing in ABC and using homemade leverage. c. What is the cost of equity for ABC? What is it for XYZ? d. What is the WACC for ABC? For XYZ? What principle have you illustrated? Homemade Dividends [LO2] You own 1,000 shares of stock in Avondale Corporation. You will receive a $3.15 per share dividend in one year. In two years, the compar will pay a liquidating dividend of $57 per share. The required return on the company's stock is 15 percent. What is the current share price of your stock (ignoring taxes)? If you would rather have equal dividends in each of the next two years, show how you can accomplish this by creating homemade dividends. Hint: Dividends will be in the form of an annuity