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

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Accounting

ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $575,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $287,500 and the interest rate on its debt is 8.5 percent. Both firms expect EBIT to be $64,000. Ignore taxes.

Suppose Rico invests in ABC Co. and uses homemade leverage. Calculate his total cash flow and rate of return.

Total Cash Flow $ _______

Rate of Return _______ %

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