ABC Co. and XYZ Co. are identical firms in every respects except for capital structure. ABC is all equity financed with $525,000 in stock. XYZ utilizes both stock and perpetual debt; its stock is worth $262,500 and interest rate on debt is 5.3 percent. Both firms expect EBIT to be $57,000.
i. Rico owns $26,250 worth of XYZ's stock. Find rate of return is he anticipating?
ii. Assume Rico invests in ABC Co and utilizes homemade leverage. Determine the total cash flow and rate of return.
iii. Compute cost of equity for ABC and XYZ?
v. Determine WACC for ABC and XYZ?