ABC Company and XYZ Company are identical firms in all respects except for their capital structure. ABC is all-equity financed with $650,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $325,000 and the interest rate on its debt is 6.5 percent. Both firms expect EBIT to be $ 71,000. Ignore taxes. What is the cost of equity for ABC and 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
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ABC Company and XYZ Company are identical firms in all respects except for their capital structure.
ABC is all - equity financed with $650,000 in stock. XYZ uses both stock and perpetual debt; its stock
is worth $325,000 and the interest rate on its debt is 6.5 percent. Both firms expect EBIT to be $
71,000. Ignore taxes. What is the cost of equity for ABC and XYZ?
Transcribed Image Text:ABC Company and XYZ Company are identical firms in all respects except for their capital structure. ABC is all - equity financed with $650,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $325,000 and the interest rate on its debt is 6.5 percent. Both firms expect EBIT to be $ 71,000. Ignore taxes. What is the cost of equity for ABC and XYZ?
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