ABC Co and XYZ Co are identical firms in all respects except for their capital structure ABC is all equity financed with $625,000 in stock XYZ uses both stock and perpetual debt its stock is worth $312,500 and the interest rate on its debt is 5 5 percent Both firms expect EBIT to be $68,000 Ignore taxes a Rico owns $37,500 worth of XYZs stock What rate of return is he expecting (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e g , 32 16 ) b Suppose Rico invests in ABC Co and uses homemade leverage Calculate his total cash flow and rate of return (Do not round intermediate calculations and enter your rate of return answer as a percent rounded to 2 decimal places, e g , 32 16 ) c What is the cost of equity for ABC and XYZ (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e g , 32 16 ) d What is the WACC for ABC and XYZ (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e g , 32 16 ) a Rate of return 16 26 b Cash flow $ Rate of return 16 26 c ABC cost of equity 10 88 XYZ cost of equity 16 26 d ABC WACC 10 88 XYZ WACC 10 88

Question

ABC Co  and XYZ Co  are identical firms in all respects except for their capital structure  ABC is all equity financed with $625,000 in stock  XYZ uses both stock and perpetual debt  its stock is worth $312,500 and the interest rate on its debt is 5 5 percent  Both firms expect EBIT to be $68,000  Ignore taxes  a  Rico owns $37,500 worth of XYZs stock  What rate of return is he expecting  (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e g , 32 16 ) b  Suppose Rico invests in ABC Co  and uses homemade leverage  Calculate his total cash flow and rate of return  (Do not round intermediate calculations and enter your rate of return answer as a percent rounded to 2 decimal places, e g , 32 16 ) c  What is the cost of equity for ABC and XYZ  (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e g , 32 16 ) d  What is the WACC for ABC and XYZ  (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e g , 32 16 ) a  Rate of return 16 26   b  Cash flow   $ Rate of return 16 26   c  ABC cost of equity 10 88   XYZ cost of equity 16 26   d  ABC WACC 10 88   XYZ WACC 10 88

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a.	Rico owns $37,500 worth of XYZs stock. What rate of return is he expecting? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
b.	Suppose Rico invests in ABC Co. and uses homemade leverage. Calculate his total cash flow and rate of return. (Do not round intermediate calculations and enter your rate of return answer as a percent rounded to 2 decimal places, e.g., 32.16.)
c.	What is the cost of equity for ABC and XYZ? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
d.	What is the WACC for ABC and XYZ? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Question

ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $625,000 in stock.

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