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 in equal proportions; its stock is worth $437,500 and the interest rate on its debt is 8 percent. Both firms expect EBIT to be $91,000 every year, forever. Ignore taxes. (Do not round intermediate calculations. Round the final answers to 2 decimal places. Omit $ sign in your response.) a. Richard owns $87,500 worth of XYZs stock. What rate of return is he expecting? Rate of return % b. Calculate the cash flows and rate of return by investing in ABC and using homemade leverage, how Richard could generate exactly the same.

Total cash flow	$
Rate of return	%

c. What is the cost of equity for ABC? What is it for XYZ?

	Cost of equity
ABC	%
XYZ	%

d. What is the WACC for ABC? For XYZ?

	WACC
ABC	%
XYZ	%