a. Richard owns $33,000 worth of XYZ's stock. What rate of return is he expecting? Rate of return b. Calculate the cash flows and rate of return by investing in ABC, and using homemade leverage, how Richard could generate exactly the same? Total cash flow Rate of return ABC XYZ % C. What is the cost of equity for ABC? What is it for XYZ? Cost of equity ABC XYZ WACC $ % d. What is the WACC for ABC? For XYZ? %
a. Richard owns $33,000 worth of XYZ's stock. What rate of return is he expecting? Rate of return b. Calculate the cash flows and rate of return by investing in ABC, and using homemade leverage, how Richard could generate exactly the same? Total cash flow Rate of return ABC XYZ % C. What is the cost of equity for ABC? What is it for XYZ? Cost of equity ABC XYZ WACC $ % d. What is the WACC for ABC? For XYZ? %
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:a. Richard owns $33,000 worth of XYZ's stock. What rate of
return is he expecting?
Rate of return
b. Calculate the cash flows and rate of return by investing in
ABC, and using homemade leverage, how Richard could
generate exactly the same?
Total cash flow
Rate of return
ABC
XYZ
%
c. What is the cost of equity for ABC? What is it for XYZ?
Cost of equity
ABC
XYZ
$
d. What is the WACC for ABC? For XYZ?
WACC
%
Transcribed Image Text:ABC Co. and XYZ Co. are identical firms in all respects except
for their capital structure. ABC is all-equity financed with
$550,000 in stock. XYZ uses both stock and perpetual debt in
equal proportions; its stock is worth $275,000 and the interest
rate on its debt is 10 percent. Both firms expect EBIT to be
$59,000 every year, forever. Ignore taxes. (Do not round
intermediate calculations. Round the final answers to 2
decimal places. Omit $ and % sign in your response.)
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