BC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $700,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $350,000 and the interest rate on its debt is 8.5 percent. Both firms expect EBIT to be $73,000. Ignore taxes.

Rico owns $52,500 worth of XYZ's stock. What rate of return is he expecting? (Round your answer to 2 decimal places. (e. g., 32.16))

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5 July, 21:59

BC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $700,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $350,000 and the interest rate on its debt is 8.5 percent. Both firms expect EBIT to be $73,000. Ignore taxes.

Rico owns $52,500 worth of XYZ's stock. What rate of return is he expecting? (Round your answer to 2 decimal places. (e. g., 32.16))

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Answers (1)

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Chloe Olson · Answer 1

12.36%

Explanation:

Given that

Earning before tax and interest = $73,000

Worth Stock = $350,000

Debt = 8.5%

The computation of rate of return is shown below:-

Earning before tax and interest - Worth Stock * Debt

= $73,000 - $350,000 * 8.5%

= $73,000 - $29,750

= $43,250

Return on $52,500

= ($43,250 : $350,000) * $52,500

= $6,488

Return as Percentage = $6,488 : $52,500

= 12.36%