Qwert Typewriter Company and Yuiop Typewriters, Inc., are identical except for capital structures. Qwert has 50 percent debt and 50 percent equity financing, whereas Yuiop has 20 percent debt and 80 percent equity financing. (All percentages are in market value terms.) The borrowing rate for both companies is 13 percent in a no-tax world, and capital markets are assumed to be perfect. The earnings of both companies are not expected to grow, and all earnings are paid out to shareholders in the form of dividends.

a. If you own 2 percent of the common stock of Qwert, what is your dollar return if the company has net operating income of $360,000 and the overall capitalization rate of the company, k_o, is 18 percent? What is the implied equity capitalization rate, k_e?

b. Yuiop has the same net operating income as Qwert. What is the implied equity capitalization rate of Yuiop? Why does it differ from that of Qwert?

Answer rating: 100% (QA)

Answer a Dollar return if I own 2 of Qwerts common stock 4600 Implied Equity Capitalization Rate ke of Qwerty 23 b Implied Equity Capitalization Rate ... View the full answer