# ABC Co. and XYZ Co. are identical firms in all respects except for their capital structures. ABC is all-equity financed with \$425,000 in stock.

ABC Co. and XYZ Co. are identical firms in all respects except for their capital structures. ABC is all-equity financed with \$425,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth \$212,500 and the interest rate on its debt is 6 percent. Both firms expect EBIT to be \$48,000. Ignore taxes. (If you can give the result in Excel please?)

a. Richard owns \$21,250 worth of XYZ’s stock. What rate of return is he expecting? (Do not round intermediate calculations. answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Rate of return      ___ %

b. Suppose Richard invests in ABC Co. and uses homemade leverage to match his cash flow in part a. Calculate his total cash flow and rate of return. ( return answer as a percent. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Total cash flow ____\$

Rate of return ____ %

c. What is the cost of equity for ABC and XYZ? (Do not round intermediate calculations. answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Cost of equity

ABC ___ %

XYZ _____%