This question is designed to show basic usages of the MUM propositions and their implications in corporate structure. ABC Inc. and XYZ Inc. are identical in every way except their capital structures. ABC Inc. is an all- equity firm, has 100,000 shares of capital stock outstanding, currently worth $100 per share. XYZ Inc. uses leverage in its capital structure. The market value of XYZ's debt is $1,000,000 and the cost of debt is 2%. Assume that every investor, whether corporation or individual, can borrow at interest rate 2%. Each firm expects to have EBIT of $500,000 in perpetuity. Assume that neither firm pays corporate taxes. Personal taxes are ignored. (i) (3pt) What is the value of XYZ Inc.? (li) (3pt) What is the market value of XYZ's equity? How about its D/E ratio? (ii) (4pt) Suppose you want to purchase 10% of ABC's equity. How much does it cost? What is the annual percentage return for owning 10% of ABC's equity?(iv) (8pt) (Homemade Unleverage) Suppose you are not able to buy ABC's equity (maybe no one is selling ABC's stock in the market) but XYZ's equity is available for purchase. Propose an investment strategy with 10% of XYZ's equity and possibly borrowing/lending to replicate the cost and dollar return of owning 10% of ABC's equity. Please state whether you should borrow or lend and calculate the amount of borrowing or lending. (v) (6pt) What is the expected return on ABC's equity? How about return on XYZ's equity? (vi) (3pt) Suppose XYZ Inc. is planning to issue more debt and use all the proceeds to buy back some of the outstanding stocks. As a result, the firm's D/E ratio is expected to increase to 1/5. What is the value of XYZ after this announcement? (vii) (3pt) What is the expected return of XYZ's equity after its D/E ratio falls to 1/5