Computation of cost of equity, rate of return and wacc

Assignment Help Finance Basics

Reference no: EM139953

Computation of cost of equity, Rate of return and WACC

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 $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%. Both firms expect EBIT to be $90,000. Ignore taxes.

(a) Rico owns $30,000 worth of XYZ's stock. What rate of return is he expecting?

(b) Show how Rico could generate exactly the same cash flows and rate of return by investing in ABC and using home made leverage (i.e., by borrowing at the risk free rate of 10%.)

(d) What is the WACC for ABC? For XYZ? What principle have you illustrated?

Reference no: EM139953

Questions Cloud

What will the diameter of the bubble : A 72 person stands on a uniform ladder 4.5 long, that weighs 75. The floor is rough; hence, it exerts both a normal force, and a frictional force, on the ladder. The wall, on the other hand, is frictionless; it exerts only a normal force.

House burnt down due to accidental causes : A real estate broker was hired as a rental agent for a house. The house burnt down due to accidental causes. In this circumstance.

Global structure for belgium country : Which one (or two) more effective in the country (Belgium) might be to operate, because what you have discovered to date business / culture in this country or region?

How would accept order affect maui juda''s operating income : How would accept the order affect Maui Juda's operating income? In addition to the special order's effect, what other (long-term, qualitative) factors should Maui Juda's managers consider in deciding whether to accept the order?

Computation of cost of equity, rate of return and wacc : Computation of cost of equity, Rate of return and WACC and What is the cost of equity for ABC and What is it for XYZ

How far does the ball travel before stopping : A sealed tank containing seawater to a height of 11.1 also contains air above the water at a gauge pressure of 2.95. Water flows out from the bottom through a small hole.

Defense mechanisms and coping strategies : Researchers draw a distinction among defense mechanisms and coping strategies, in that defense method are _____ while coping strategies are _____.

What is the equilibrium temperature of the hot asphalt : If the football has the mass of .420 kg and the time of contact with the ball is .014 s, what is the force exerted by the ball on a kicker's foot.

Purpose an analysis - buy bindings and leave facilities idle : X-Perience's accountants predict that purchasing the bindings from Livingston will enable the company to avoid $1,800 of fixed overhead. Purpose an analysis to show whether X-Perience should make or buy the bindings.

User Account

All Pages