Question abc co and xyz co are identical firms in all, Ask an Expert

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Question: ABC Co. and XYZ Co. are 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 $400,000 and the interest rate on its debt is 10 percent. Both firms expect EBIT to be $97,000. Ignore taxes.

Part a: Rico owns $80,000 worth of XYZ's stock. What rate of return is he expecting?

Part b: Suppose Rico invests in ABC Co. and uses homemade leverage. Calculate his total cash flow and rate of return

Part c: What is the cost of equity for ABC and XYZ?

Part d: What is the WACC for ABC and XYZ?

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M92769173

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