Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Basic Finance Expert

problem: Homemade leverage and WACC. ABC Co. & XYZ Co. is identical firms in all respects except for their capital structure. ABC is all equity financed with $800,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth USD 400,000 and the interest rate on its debt is ten percent. Both firms expect EBIT to be USD 90,000. Ignore all kind of taxes.

[A]   Show how Rico could generate exactly the same cash flows and rate of return by investing in ABC and using homemade leverage [i.e., by borrowing at the risk free rate of 10 percent.]

[B]   What is the WACC for ABC? For XYZ? What principle have you illustrated?

[C]   Rico owns $30,000 worth of XYZ's stock. What rate of return is he expecting?

[D]   Find the cost of equity for ABC? What is it for XYZ?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M916205

Have any Question? 


Related Questions in Basic Finance

Ac corp currently uses no debt and its beta is 120

ABC Corp. currently uses no debt and its beta is 1.20. Further, ABC's CFO is considering moving to a capital structure with 40% debt. Assume the company's current ROE is 10.0%, its tax rate is 35.0%, the risk free rate a ...

If you wish to protect yourself from falling prices what

If you wish to protect yourself from falling prices, what type of an order would be the best to use? If you wish to protect yourself from rising prices, what type of order is the best to use? If you wish to buy a market ...

If asset as beta is greater than asset bs beta does this

If asset A's beta is greater than asset B's beta, does this mean that asset A has more risk than asset B? Explain? What is the difference between the security market line and the capital market line? How should an invest ...

Use primary and secondary sources to write a report about

Use primary and secondary sources to write a report about your future career. Explore a career position that interests you. Determine the job outlook, present level of employment, salary trends, typical responsibilities, ...

1 describe a mixed or split-plot factorial design this

1. Describe a mixed, or split-plot, factorial design. This design is a hybrid of what two other designs? 2. What is a main effect? 3. How many main effects can be tested in a 2 x 2 design? In a 3 x 3 design? In a 2 x 2 x ...

Discussion please use references bullwhat effect do

Discussion ** please use references ** • What effect do interest rates have on the calculation of future and present value? ( 125- words ) • How does the length of time affect future and present value? How do these two f ...

1 give a simple definition of earnings per share2 assume

1. Give a simple definition of earnings per share. 2. Assume that a corporation is a nonpublic company. Comment on the requirement for this firm to disclose earnings per share. 3. Keller & Fink, a partnership, engages in ...

1 suppose that a company is expected to pay a dividend per

1. Suppose that a company is expected to pay a dividend per share of $20 per year forever. If investors require a 10% rate of return to invest in this stock, what is its price? 2. Suppose that a friend has started a busi ...

Contrast lookback options and barrier options and explain

Contrast lookback options and barrier options and explain the difference between in- and out-options? Explain how weather derivatives could be used by an electric utility to manage the risk associated with power consumpt ...

In formulating key concept exercise consider the following

In formulating Key Concept Exercise, consider the following questions: What are the benefits of just-in-time (JIT) techniques? What types of organisations use JIT techniques? Should things change if they are running smoo ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

WalMart Identification of theory and critical discussion

Drawing on the prescribed text and/or relevant academic literature, produce a paper which discusses the nature of group

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro