ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $425,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $212,500 and the interest rate on its debt is 6 percent. Both firms expect EBIT to be $48,000. Ignore taxes.

a.	Richard owns $21,250 worth of XYZs stock. What rate of return is he expecting? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Rate of return

%

b.	Suppose Richard invests in ABC Co. and uses homemade leverage to match his cash flow in part a. Calculate his total cash flow and rate of return. (Do not round intermediate calculations and round your percentage value 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? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

	Cost of equity
ABC	%
XYZ	%

d.	What is the WACC for ABC and XYZ? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

	WACC
ABC	%
XYZ	%