ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $675,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $337,500 and the interest rate on its debt is 7.5 percent. Both firms expect EBIT to be $72,000. Ignore taxes.

a.	Rico owns $50,625 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 anduses 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 andXYZ?(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	%