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St. Louis Co. and St. Romuald Co. are identical firms in all respects except for their capital structure. St. Louis is all-equity financed with $780,000 in stock. St. Romuald uses both stock and perpetual debt; its stock is worth $390,000 and the interest rate on its debt is 8%. Both firms expect EBIT to be $87,000. Ignore taxes. a. Clifford owns $48,750 worth of St. Romuald's stock. What rate of return is he expecting? (Enter your answer as a percentage rounded to 2 decimal places.) Rate of return % b. Suppose Clifford invests in St. Louis Co. and uses homemade leverage. Calculate his total cash flow and rate of return. (Round rate of return answer as a percent rounded to 2 decimal places. Omit $ sign in your response.) Total cash flow Rate of return c. What is the cost of equity for St. Louis and St. Romuald? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places.) Cost of equity St. Louis St. Romuald d. What is the WACC for St. Louis and St. Romuald? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places.) WACC St. Louis St. Romuald

St. Louis Co. and St. Romuald Co. are identical firms in all respects except for their capital structure. St. Louis is all-equity financed with $780,000 in stock. St. Romuald uses both stock and perpetual debt; its stock is worth $390,000 and the interest rate on its debt is 8%. Both firms expect EBIT to be $87,000. Ignore taxes. a. Clifford owns $48,750 worth of St. Romuald's stock. What rate of return is he expecting? (Enter your answer as a percentage rounded to 2 decimal places.) Rate of return % b. Suppose Clifford invests in St. Louis Co. and uses homemade leverage. Calculate his total cash flow and rate of return. (Round rate of return answer as a percent rounded to 2 decimal places. Omit $ sign in your response.) Total cash flow Rate of return c. What is the cost of equity for St. Louis and St. Romuald? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places.) Cost of equity St. Louis St. Romuald d. What is the WACC for St. Louis and St. Romuald? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places.) WACC St. Louis St. Romuald

Essentials Of Investments
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
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St. Louis Co. and St. Romuald Co. are identical firms in all respects except for their capital structure. St. Louis is all-equity financed with $780,000 in stock. St. Romuald uses both stock and perpetual debt; its stock is worth $390,000 and the interest rate on its debt is 8%. Both firms expect EBIT to be $87,000. Ignore taxes. a. Clifford owns $48,750 worth of St. Romuald's stock. What rate of return is he expecting? (Enter your answer as a percentage rounded to 2 decimal places.) Rate of return % b. Suppose Clifford invests in St. Louis Co. and uses homemade leverage. Calculate his total cash flow and rate of return. (Round rate of return answer as a percent rounded to 2 decimal places. Omit $ sign in your response.) Total cash flow $ Rate of return c. What is the cost of equity for St. Louis and St. Romuald? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places.) Cost of equity St. Louis 응 St. Romuald d. What is the WACC for St. Louis and St. Romuald? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places.) WACC St. Louis 응 St. Romuald
Transcribed Image Text:St. Louis Co. and St. Romuald Co. are identical firms in all respects except for their capital structure. St. Louis is all-equity financed with $780,000 in stock. St. Romuald uses both stock and perpetual debt; its stock is worth $390,000 and the interest rate on its debt is 8%. Both firms expect EBIT to be $87,000. Ignore taxes. a. Clifford owns $48,750 worth of St. Romuald's stock. What rate of return is he expecting? (Enter your answer as a percentage rounded to 2 decimal places.) Rate of return % b. Suppose Clifford invests in St. Louis Co. and uses homemade leverage. Calculate his total cash flow and rate of return. (Round rate of return answer as a percent rounded to 2 decimal places. Omit $ sign in your response.) Total cash flow $ Rate of return c. What is the cost of equity for St. Louis and St. Romuald? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places.) Cost of equity St. Louis 응 St. Romuald d. What is the WACC for St. Louis and St. Romuald? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places.) WACC St. Louis 응 St. Romuald
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