ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all-equity financed with 650000$ in stock. XYZ uses both stock and perpetual debt its stock is worth 325000 and the interest rate on its debt is 8 percent. Both firms expect EBIT to be 68000$. ignore taxes.

a) Ricos owns 48750$ worth of XYZ stocks. what rate of return is he expecting?

b) Show how Rico could generate exactly the same cash flow and rate of return by investing in ABC and using homemade leverage.

c) what is the cost of equity for ABC? what is it for XYZ?

d) what is the WACC For ABC ? XYZ? what principle have you illustrated