- ABC Co. and XYZ Co. are identical firms in all respects except for their capital...

 

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- ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $750,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $375,000 and the interest rate on its debt is 8 percent. Both firms expect EBIT to be $86,000. Ignore taxes. Richard owns $30,000 worth of XYZ's stock. What rate of return is he expecting? % Show how Richard could generate exactly the same cash flows and rate of return by investing in ABC and using homemade leverage. Assume Richard sells all his shares in XYZ. He then uses the $30,000 proceeds and borrows additional $30,000 to buy share in ABC. His ABC dividends will be for the total cash flow of What is the cost of equity for ABC? What is the WACC for ABC? _minus the interest charge of . His return on a $30,000 investment is %. % For XYZ? % % For XYZ? % What principle have you illustrated? - ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $750,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $375,000 and the interest rate on its debt is 8 percent. Both firms expect EBIT to be $86,000. Ignore taxes. Richard owns $30,000 worth of XYZ's stock. What rate of return is he expecting? % Show how Richard could generate exactly the same cash flows and rate of return by investing in ABC and using homemade leverage. Assume Richard sells all his shares in XYZ. He then uses the $30,000 proceeds and borrows additional $30,000 to buy share in ABC. His ABC dividends will be for the total cash flow of What is the cost of equity for ABC? What is the WACC for ABC? _minus the interest charge of . His return on a $30,000 investment is %. % For XYZ? % % For XYZ? % What principle have you illustrated?

Answer rating: 100% (QA)

1 Rate of Return for Richard in XYZ Co Richard owns 30000 worth of XYZs stock The total value of XYZ... View the full answer