ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $850,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $425,000 and the interest rate on its debt is 7 percent. Both firms expect EBIT to be $95,000. Ignore taxes.

Rico owns $85,000 worth of XYZ