St. Louis Co. and St. Romuald Co. are identical firms in all respects except for their...
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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 $650,000 in stock. St. Romauld uses both stock and perpetual debt; its stock is worth $325,000 and the interest rate on its debt is 8%. Both firms expect EBIT to be $68,000. Ignore taxes. (a) Clifford owns $48,750 worth of St. Romuald's stock. What rate of return is he expecting? (b) Show how Clifford could generate exactly the same cash flows and rate of re- turn by investing in St. Louis and using homemade leverage. (c) What is the cost of equity for St. Louis? For St. Romuald? (d) what is the WACC for St. Louis? For 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 $650,000 in stock. St. Romauld uses both stock and perpetual debt; its stock is worth $325,000 and the interest rate on its debt is 8%. Both firms expect EBIT to be $68,000. Ignore taxes. (a) Clifford owns $48,750 worth of St. Romuald's stock. What rate of return is he expecting? (b) Show how Clifford could generate exactly the same cash flows and rate of re- turn by investing in St. Louis and using homemade leverage. (c) What is the cost of equity for St. Louis? For St. Romuald? (d) what is the WACC for St. Louis? For St. Romuald?
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Answer Step by Step Explanation a For St Romuald the debt is 325... View the full answer
Related Book For
Fundamentals of corporate finance
ISBN: 978-0073382395
9th edition
Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan
Posted Date:
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