P16-9. Homemade Leverage and Weighted Average Cost of Capital ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with S425,000 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. (Do not round intermediate calculations. Round the final answers to 2 decimal places.) a. Richard owns $21,250 worth of XYZ's stock. What rate of return is he expecting? Rate of return b. Calculate the cash flows and rate of return by investing in ABC and using homemade leverage, how Richard could generate exactly the same Total cash flow Rate of return c. What is the cost of equity for ABC? What is it for XYZ? Cost of equity ABC XYZ d. What is the WACC for ABC? For XYZ WACC ABC XYZ References