Identical firms in all respects except for capital structure

Assignment Help Financial Management

Reference no: EM131617181

ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $775,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $387,500 and the interest rate on its debt is 5.8 percent. Both firms expect EBIT to be $77,000. Ignore taxes.

a. Rico owns $58,125 worth of XYZ’s stock. What rate of return is he expecting? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Rate of return %

b. Suppose Rico invests in ABC Co. and uses homemade leverage. Calculate his total cash flow and rate of return. (Do not round intermediate calculations. Enter your rate of return answer as a percent rounded 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. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Cost of equity

ABC %

XYZ %

d. What is the WACC for ABC and XYZ? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

WACC

ABC %

XYZ %

Reference no: EM131617181

Questions Cloud

One-month sterling T-bill paying : In April 2016, an FI bought a one-month sterling T-bill paying £100 million in May 2016. How many options should the FI purchase, and what will be the cost?

The cash position since the futures contract was placed : What will be the gain or loss on the cash position since the futures contract was placed?

What would the buyer have to pay the seller : what is the conversion factor? What would the buyer have to pay the seller?

A bank has average balance of transactions accounts : A bank has average balance of transactions account, what does the bank need to hold as reserves over the last two days to exactly meet the reserve requirement.

Identical firms in all respects except for capital structure : ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure.

Numerous critics of both the world bank and the imf : There are numerous critics of both the World Bank and the IMF. Chief among them is Joseph Stiglitz, nobel laureate.

What is profitability index for the set of cash flows : What is the profitability index for the set of cash flows if the relevant discount rate is 11 percent?

What is the company total book value of debt : What is the company's total market value of debt? What is your best estimate of the aftertax cost of debt? What is the company's total book value of debt?

What will the value of the firm be if company takes on debt : What will the value of the firm be if the company takes on debt equal to 60 percent of its unlevered value?

User Account

All Pages