HMT Ltd. and Jaico Ltd. are similar in terms of their earning capacity. Their EBITs are expected to be $50,000 each. HMT is all equity financed and has a value of $400,000 while Jaico has a D/E of 1 with the same value of $400,000. The interest rate is 5% per annum and both firms are exempt from taxes under a government incentive programme.

i) You own $10,000 worth of shares in Jaico Ltd. What rate of return can you expect to earn? 

ii) If you decide to move your investment to HMT Ltd., show how you could earn the same return by using homemade leverage. 

iii) What is the cost of equity for both firms? 

iv) What is the overall cost of capital for both firms? What principle would you have illustrated?