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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 $500,000 in stock. XYZ uses both stock and perpetual debt in equal proportions; its stock is worth $250,000 and the interest rate on its debt is 8 percent. Both firms expect EBIT to be $51,000 every year, forever. Ignore taxes. (Do not round intermediate calculations. Round the final answers to 2 decimal places. Omit $ sign in your response.) a. Richard owns $25,000 worth of XYZs stock. What rate of return is he expecting? Rate of return - ? %

b. Calculate the cash flows and rate of return by investing in ABC and using homemade leverage, how Richard could generate exactly the same.

c. What is the cost of equity for ABC? What is it for XYZ?

d. What is the WACC for ABC? For XYZ?

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