cost of capital

| December 8, 2015

You are given the following information:

Firm A

Equity: $26,250,000

Debt: 0

Share price: $35

# of shares: 750,000

EBIT: $1,450,000

Interest rate: N/A

Firm B

Equity: $14,000,000

Debt: $12.250,000

Share price: $35

# of shares: 400,000

EBIT: $1,450,000

Interest rate: 6%

Show how to replicate an investment in 6% of stock B by buying stock A and borrowing. Show that the dollar return of the replicating strategy is equal to the dollar return of an investment in 6% of stock B.

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