***Please, no screen-shots of the instructors manual or solution guide, these do
ID: 2673035 • Letter: #
Question
***Please, no screen-shots of the instructors manual or solution guide, these do not help as I need real world solutions I can understand. I can find the instructors manual answers online myself. Thank You.***From: Corporate Finance, 9th ed., Ross, et. al....
Got them all this week except this one...please help!
ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity finance 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 $95,000. Ignore taxes.
a. Richard owns $30,000 worth of XYZ stock. What rate of return is he expecting?
b. Show how Richard could generate exactly the same cash flows and rate of return by investing in ABC and using homemade leverage.
c. What is the cost of equity for ABC? What is it for XYZ?
d. What is the WACC for ABC? For XYZ? What principle have you illustrated?
Explanation / Answer
92,00 Dividends received = $690 return is: R = $690/$30,000 R =2.3%
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