Problem $16\mathrm{.}9$ Homemade Leverage and WACC

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

capital structure. ABC is all$-$equity financed with $$650,000$ in stock. XYZ uses both stock

and perpetual debt; its stock is worth $$325,000$ and the interest rate on its debt is $6\mathrm{.}5$

percent. Both firms expect EBIT to be $$71,000.$ Ignore taxes.

a$.$ Rico owns $$39,000$ 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 to match his

cash flow in part $($a$).$ Calculate his total cash flow and rate of return. $($Do not round

intermediate calculations and enter your 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$.,32\mathrm{.}16.)$