Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $700,000 in stock.

image text in transcribed
ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $700,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $350,000 and the interest rate on its debt is 7 percent. Both firms expect EBIT to be $73,000. Ignore taxes Richard owns $52,500 worth of XYZ's 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.) Rate of return n/r % 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. (Do not round Intermediate calculations. Enter your return answer as a percent rounded to 2 decimal places, e.g., 32.16.) Total cash flow Rate of return Sn/r n/r % 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, 0.9., 32.16.) Cost of equity ABC XYZ n/r 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, 0.9., 32.16. WACC ABC XYZ nr nr

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Personal Finance

Authors: E. Thomas Garman, Raymond Forgue

8th Edition

0618471421, 9780618471423

More Books

Students also viewed these Finance questions

Question

Why is the executive summary so important?

Answered: 1 week ago

Question

What is the background of the situation?

Answered: 1 week ago