ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all-equity

financed with $600,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $300,000 and

the interest rate on its debt is 10 percent. Both firms expect EBIT to be $73,000. Ignore taxes.

a.SupposeRico owns $30,000 worth of XYZs stock. What rate of return is she expecting?

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

c. What is the WACC for ABC? For XYZ? What principle have you illustrated?