P16-9. Homemade Leverage and Weighted Average Cost of Capital ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $525,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $262,500 and the interest rate on its debt is 10 percent. Both firms expect EBIT to be $57,000. Ignore taxes. (Do not round intermediate calculations. Round the final answers to 2 decimal places.) a. Richard owns $26,250 worth of XYZ's stock. What rate of return is he expecting? Rate of return 11.71 % b. Calculate the cash flows and rate of return by investing in ABC and using homemade leverage, how Richard could generate exactly the same. Total cash flow EA Rate of return % c. What is the cost of equity for ABC? What is it for XYZ? Cost of equity ABC 10.86 % XYZ 11.71 % d. What is the WACC for ABC? For XYZ? WACC ABC 10.86 % XYZ 10.86 %