ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $875,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $437,500 and the interest rate on its debt is 8 percent. Both firms expect EBIT to be $91,000. Ignore taxes.

a.	Rico owns $87,500 worth of XYZs stock. What rate of return is he expecting? (Round your answer 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. (Round your percentage answer 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? (Round your answers to 2 decimal places. (e.g., 32.16))

	Cost of equity
ABC	%
XYZ	%

d.	What is the WACC for ABC and XYZ? (Round your answers to 2 decimal places. (e.g., 32.16))

	WACC
ABC	%
XYZ	%