Homemade leverage and WACC

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Reference no: EM132071458

Homemade leverage and WACC: ABC Co. and XYZ Co. are identical firms in all real respects (e.g. organizational, contractual, technological). However, they have chosen different financial structures. ABC Co. is financed exclusively through equity claims with a market value of $750,000. XYZ Co. has $375,000 of equity shares outstanding; its debt claims pay an 8 percent coupon. Both firms expect earnings to be $90,000 in perpetuity. Neither firm pays taxes. Assume you own a $30,000 stake in XYZ Co. equity and you expect a 16 percent return on your investment. If you were to sell this stake in XYZ Co., how much would you have to borrow and utilize in a strategy of leveraged investing in ABC Co. in order to achieve the same 16 percent rate of return you expected from your investment in XYZ Co.? Assume you can borrow at a rate of 8 percent. None of these values are correct. $30,000 $90,000 $60,000.

Reference no: EM132071458

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