Problem $16-9$ Homemade Leverage and WACC

ABC Co$.$ and $xYZ$ Co$.$ are identical firms in all respects except for their capital structure. ABC is all equity financed with $$575,000$ in stock. $xYZ$ uses both stock and perpetual debt; its stock is worth $$287,500$ and the interest rate on its debt is $8\mathrm{.}5$ percent. Both firms expect EBIT to be $$64,000.$ Ignore taxes.

a$.$ Richard owns $$34,500$ worth of XYZ$\text{'}$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$.,32\mathrm{.}16.)$

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$.,32\mathrm{.}16.)$

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, e$.$g$.,32\mathrm{.}16.)$

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, e$.$g$.,32\mathrm{.}16.)$

$\backslash$table$[[$a$.,$Rate of return,$\%$