1) Please explain respectively what agency cost of equity and agency cost of debt are.

2) Consider the following information. Firm XYZ face a new investment opportunity with an initial investment of 8 million. The following is firm XYZ's annual returns depend on the realized state after investing:

Annual ReturnProbability

State 1 20 million50%

State 26 million10%

State 35 million40%

Suppose that verifying states is costly, should firm XYZ choose100% debt financing or 100% equity financing for this project? Please provide explanations for your answer.