Question: Firm X and Y are identical in all respects except for their capital structure. Firm X is all equity financed with $800,000 in stock. Firm Y uses both stock and perpetual debt; its stock is worth $400,000 & the interest rate on its debt is 10%. Both firms expect EBIT to be $90,000. Ignore all taxes.
[A] Determine the cost of equity for Firm X and Y?
[B] Determine the weighted average cost of capital (WACC) for Firm X and Y?
[C] What conclusions can you make from your results from Parts [A] and [B] above?