EBK CORPORATE FINANCE
11th Edition
ISBN: 8220102798878
Author: Ross
Publisher: YUZU
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Textbook Question
Chapter 16, Problem 9QP
Homemade Leverage and WACC ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $640,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $320,000 and the interest rate on its debt is 8 percent Both firms expect EBIT to be $69,000. Ignore taxes.
- a. Richard owns $30,000 worth of XYZ's stock. What
rate of return is he expecting'/ - b. Show how Richard could generate exactly the same cash flows and rate of
return by investing in ABC and using homemade leverage. - c. What is the
cost of equity for ABC? What is it for XYZ? - d. What is the WACC for ABC? For XYZ? What principle have you illustrated?
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ABC co and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $780,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $390,000 and the interest rate on its debt is 8 percent. Both firms expect EBIT to be $87,000. Ignore taxes. (SHOW YOUR WORK)
What is the cost of equity for ABC? What is it for XYZ?
What is the WACC for ABC? For XYZ? What principle have you illustrated?
Homemade Leverage and WACC ABC Company and XYZ Company 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. a. Rico owns $39,000 worth of XYZ's stock. What rate of return is he expecting? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. Suppose Rico invests in ABC Company and uses homemade leverage to match his cash flow in part (a). Calculate his total cash flow and rate of return. (Do not round intermediate calculations and enter your return answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the cost of equity for ABC and xyz? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) d. What is…
ABC Company and XYZ Company are identical firms in all respects except for their
capital structure. ABC is all-equity financed with $425,000 in stock. XYZ uses both stock
and perpetual debt; its stock is worth $212,500 and the interest rate on its debt is 6
percent. Both firms expect EBIT to be $48,000. Ignore taxes.
a. Rico owns $21,250 worth of XYZ's stock. What rate of return is he expecting? (Do not
round intermediate calculations and enter your answer as a percent rounded to 2
decimal places, e.g., 32.16.)
b. Suppose Rico invests in ABC Company and uses homemade leverage. Calculate his
total cash flow and rate of return. (Do not round intermediate calculations and enter
your rate of return answer as a percent rounded to 2 decimal places, e.g., 32.16.)
c. What is the cost of equity for ABC and XYZ? (Do not round intermediate calculations
and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
d. What is the WACC for ABC and XYZ? (Do not round intermediate…
Chapter 16 Solutions
EBK CORPORATE FINANCE
Ch. 16 - MM Assumptions List the three assumptions that lie...Ch. 16 - Prob. 2CQCh. 16 - Prob. 3CQCh. 16 - MM Propositions What is the quirk in the tax code...Ch. 16 - Prob. 5CQCh. 16 - Prob. 6CQCh. 16 - Optimal Capital Structure Is there an easily...Ch. 16 - Financial Leverage Why is the use of debt...Ch. 16 - Homemade Leverage What is homemade leverage?Ch. 16 - Capital Structure Goal What is the basic goal of...
Ch. 16 - Prob. 1QPCh. 16 - EBIT, Taxes, and Leverage Repeat p arts (a) and...Ch. 16 - ROE and Leverage Suppose the company in Problem 1...Ch. 16 - Break-Even EBIT Franklin Corporation is comparing...Ch. 16 - Prob. 5QPCh. 16 - Break-Even EBIT and Leverage Kolby Corp. is...Ch. 16 - Leverage and Stock Value Ignoring taxes in Problem...Ch. 16 - Homemade Leverage Star, Inc., a prominent consumer...Ch. 16 - Homemade Leverage and WACC ABC Co. and XYZ Co. are...Ch. 16 - MM Scarlett Corp. uses no debt. The weighted...Ch. 16 - Prob. 11QPCh. 16 - Calculating WACC Weston Industries has a...Ch. 16 - Prob. 13QPCh. 16 - MM and Taxes Bruce Co. expects its EBIT to be...Ch. 16 - MM and Taxes In Problem 14, what is the cost of...Ch. 16 - MM Proposition I Levered, Inc., and Unlevered,...Ch. 16 - MM Tool Manufacturing bas an expected EBIT of...Ch. 16 - Firm Value Cavo Corporation expects an EBIT of...Ch. 16 - MM Proposition I with Taxes The Dart Company is...Ch. 16 - MM Proposition I without Taxes Alpha Corporation...Ch. 16 - Cost of Capital Acetate, Inc., has equity with a...Ch. 16 - Homemade Leverage The Veblen Company and the...Ch. 16 - MM Propositions Locomotive Corporation is planning...Ch. 16 - Stock Value and Leverage Green Manufacturing,...Ch. 16 - Prob. 25QPCh. 16 - Prob. 26QPCh. 16 - Prob. 27QPCh. 16 - Prob. 28QPCh. 16 - Prob. 29QPCh. 16 - Prob. 30QPCh. 16 - STEPHENSON REAL ESTATE RECAPITALIZATION Stephenson...Ch. 16 - Prob. 2MCCh. 16 - Prob. 3MCCh. 16 - Prob. 4MCCh. 16 - Prob. 5MC
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