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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 $500,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $250,000 and the interest rate on its debt is 8 percent. Both firms expect EBIT to be $51,000. Ignore taxes. a. Rico owns $25,000 worth of XYZ’s stock. What rate of return is he expecting? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Rate of return % b. Suppose Rico invests in ABC Co. and uses homemade leverage. Calculate his total cash flow and rate of return. (Do not round intermediate calculations. Enter your rate of return answer as a percent rounded to 2 decimal places, e.g., 32.16.) Total cash flow $ Rate of return % c. What is the cost of equity for ABC and XYZ? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity ABC % XYZ % d. What is the WACC for ABC and XYZ? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) WACC ABC % XYZ %
Pronet has an annual sale of $724 million from its 600 retail stores. Pronet can reduce its mail float by 2 days through the use of wire transfers. The annual cost of the wire transfers is expected to be $105,610. If Pronet's cost of short term funds..
The dividend paid this year on a share of common stock is $10. If dividends grow at a 5% rate for the foreseeable future, and the required rate of return is 10%, what is the value of the stock today?
After an injury, you win a lawsuit judgment of $3,524 per month starting next month for a total of 42 months. If the interest rate is 9.1% APR compounded monthly, what is the current equivalent lump sum of your settlement?
According to CAPM, how would the expected return on a stock with a beta of 1.5 compare to the expected return on the market? You have $75,000 to invest and want to put together a two-asset portfolio consisting of U.S. T-bills and a risky asset. If th..
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A foreign exchange trader for Green Valley Capital, are exploring covered interest arbitrage opportunities between Euros and US Dollars ($) for the next 60 days. You have 1million euros or $ 1.1 million at the current spot rate for the covered intere..
DeCento's is analyzing two machines to determine which one it should purchase. Whichever machine is purchased will be replaced at the end of its useful life. The company requires a 12 percent rate of return and uses straight-line depreciation to a ze..
Goodbye, Inc., recently issued new securities to finance a new TV show. The project cost $13.3 million, and the company paid $655,000 in flotation costs. If the company issued new securities in the same proportion as its target capital structure, wha..
Suppose you buy a 8.8 percent coupon bond today for $1,090. The bond has 10 years to maturity. What rate of return do you expect to earn on your investment? Two years from now, the YTM on your bond has increased by 2 percent, and you decide to sell. ..
discuss the following topic should the reduced tax rate on dividends affect a multinational firms capital structure?a
If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY). What is the HPY on your investment?
Tapley Inc. currently has total capital equal to $5 million, has zero debt, is in the 40% federal-plus-state tax bracket, has a net income of $1 million, and distributes 40% of its earnings as dividends. What is the stock’s current price per share (..
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