Problem $16-9$ Homemade Leverage and WACC $[$LO$1]$

ABC Company and $xYZ$ Company are identical firms in all respects except for their

capital structure. ABC is all$-$equity financed with $$400,000$ in stock. $xYZ$ uses both stock

and perpetual debt; its stock is worth $$200,000$ and the interest rate on its debt is $5\mathrm{.}8$

percent. Both firms expect EBIT to be $$45,000.$ Ignore taxes.

a$.$ Rico owns $$20,000$ worth of XYZ$\text{'}$s stock. What rate of return is he expecting? $($Do not

round intermediate calculations and enter your answer as a percent rounded to $2$

decimal places, e$.$g$.,32\mathrm{.}16.)$

b$.$ Suppose Rico invests in ABC Company and uses homemade leverage. Calculate his

total cash flow and rate of return. $($Do not round intermediate calculations and enter

your rate of return answer as a percent rounded to $2$ decimal places, e$.$g$.,32\mathrm{.}16.)$

c$.$ What is the cost of equity for ABC and $xYZ?($Do not round intermediate calculations

and enter your answers as a percent rounded to $2$ decimal places, e$.$g$.,32\mathrm{.}16.)$

d$.$ What is the WACC for ABC and $xYZ?($Do not round intermediate calculations and

enter your answers as a percent rounded to $2$ decimal places, e$.$g$.,32\mathrm{.}16.)$