ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure....

ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $650,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $325,000 and the interest rate on its debt is 6.5 percent. Both firms expect EBIT to be $71,000. Ignore taxes.

1. Rico owns $39,000 worth of XYZ’s stock. What rate of return is he expecting?

2. What is the WACC for ABC and XYZ?

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jeff jeffy answered 3 months ago

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