ABC Co. and XYZ Co. are identical firms in all respects except
for their capital structure. ABC is all equity financed with
$450,000 in stock. XYZ uses both stock and perpetual debt; its
stock is worth $225,000 and the interest rate on its debt is 6
percent. Both firms expect EBIT to be $51,000. Ignore taxes.
Rico owns $22,500 worth of XYZAc??cs stock. What rate of return is
he expecting? (Round your answer to 2 decimal places.
|Rate of return|
Suppose Rico invests in ABC Co and uses homemade leverage.
Calculate his total cash flow and rate of return. (Round
your percentage answer to 2 decimal places. (e.g.,
|Total cash flow|
|Rate of return|
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