Answers are provided in brackets, please show solutions as to how answers are derived. Thanks....
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Answers are provided in brackets, please show solutions as to how answers are derived. Thanks.
7. ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all-equity financed with $600,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $300,000 and the interest rate on its debt is 10%. Both firms expect EBIT to be $85,000. Ignore taxes.
a. What is the cost of equity for ABC and XYZ? (Ans. ABC=0.14, XYZ=0.18)
b. What is the WACC for ABC and XYZ? (Ans. ABC=0.14, XYZ=0.14)
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