1. ABC and XYZ are two industry competitors, operating under MM perfect capital markets environment....
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1. ABC and XYZ are two industry competitors, operating under MM perfect capital markets environment. ABCs market-value-based Debt/Equity ratio is 3/7. Its market-value-based cost of debt, rD, is 7.5% and cost of equity, rE, is 15%. XYZs Debt/Equity ratio is 2/3. XYZs cost of debt, rD, is 7.875%
A. What is the required rate of return on ABCs assets, rA? 12.75% B. What is ABCs weighted average cost of capital (WACC)? Explain. 12.75% C. What is the required rate of return on XYZs assets, rA? Explain. 12.75% D. What is XYZs weighted average cost of capital (WACC)? Explain. 12.75% E. What is the required rate of return on XYZs unlevered equity? Explain. F. What is the required rate of return on XYZs levered equity, rE?
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