1. Quis plc and Zanda plc are two companies whose shares are quoted on the London stock exchange. Their assets have the same level of systematic risk. Each company has a constant annual earnings flow (before dividends and interest) of 5 million. This level of earnings is expected to be maintained by both companies in the future. Quis plc. has issued 8 million of 9% irredeemable bonds; each 100 bond is currently quoted at 50. Zanda plc. has no debt. Each of Quis's 17.2 million shares is currently quoted at 1, while Zanda has issued 46.4 million shares each of which has a market price of 50p. Both companies pay out the entire earnings flow each year as dividends and interest. Assume no taxation.

Required:

1. Calculate the value of both Quis plc and Zanda plc. Is the market in equilibrium?
2. Calculate the cost of equity and the cost of debt of both companies.