Problem $4(4$points$)$

ABCCCo. and xYZCo. are identical firms in all respects except for their capital structure. ABC is all equity

financed with $$1,000,000$ in stock. XYZ uses both stock and perpetial debt; its stock is worth $$500,000$ and

the interest rate on its debt is $8$ percent. Both fims expect EBIT to be $$100,000.$ Ignore taxes

Brahim owns $$50,000$ worth of ABC stock. What rate of return is he expecting?

Show how Brahim could generate exactly the same cash flows and rate of retum by investing in $xYZ$ and

using homemade leverage.