Problem $1(4$points$)$

ABCCO. and $xYZ$ Co$.$ are identical firms in all respects except for their capital structure. ABC is all equity financed with $$1,000,000$ in stock. XYZ uses both stock and perpetual debt; its stock is worth $$500,000$ and the interestrate on its debt is $9$ percent. Both firms expect EBIT to be $$98,000.$ Ignore taxes.

Brahim owns $$20,000$ worth of XYZ$\text{'}$s stock. What rate of return is he expecting?

Show how Brahim could generate exactly the same cash flows and rate of return by investing in ABC and using homemade leverage.