Question
ABC Co. and XYZ Co. are identical firms in all respects except for their capital structures. ABC is all-equity financed with $425,000 in stock. XYZ
ABC Co. and XYZ Co. are identical firms in all respects except for their capital structures. ABC is all-equity financed with $425,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $212,500 and the interest rate on its debt is 6 percent. Both firms expect EBIT to be $48,000. Ignore taxes. (If you can give the result in Excel please?)
a. Richard owns $21,250 worth of XYZ's stock. What rate of return is he expecting? (Do not round intermediate calculations. answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Rate of return___ %
b. Suppose Richard invests in ABC Co. and uses homemade leverage to match his cash flow in part a. Calculate his total cash flow and rate of return. ( return answer as a percent. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Total cash flow ____$
Rate of return____ %
c. What is the cost of equity for ABC andXYZ? (Do not round intermediate calculations. answers as a percent rounded to 2 decimal places, e.g., 32.16.)
Cost of equity
ABC ___ %
XYZ _____%
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