# ABC Co. and XYZ Co. are identical firms in all respects except for their capital structures

ABC Co. and XYZ Co. are identical firms in all respects except for their capital structures. ABC is all-equity financed with \$425,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth \$212,500 and the interest rate on its debt is 6 percent. Both firms expect EBIT to be \$48,000. Ignore taxes. (If you can give the result in Excel please?)

a. Richard owns \$21,250 worth of XYZ’s stock. What rate of return is he expecting? (Do not round intermediate calculations. answer as a percent rounded to 2 decimal places, e.g., 32.16.)

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Rate of return      ___ %

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. ( return answer as a percent. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Total cash flow ____\$

Rate of return ____ %

c. What is the cost of equity for ABC and XYZ? (Do not round intermediate calculations. answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Cost of equity

ABC ___ %

XYZ _____%

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