Verpfndung AG and Zeit AG are identical firms in all respects except for their capital structure. Verpfndung is all equity financed, with 500,000 in equity shares. Zeit AG uses both shares and perpetual debt; its equity is worth 250,000, and the interest rate on its debt is 10 per cent. Both firms expect EBIT to be 100,000. Assume that both firms maintain a dividend payout rate of 100 per cent and that the book value exactly resembles the market value for both debt and equity. Ignore taxes.

(a) Robert owns 25,000 worth of Zeit AGs shares. What rate of return is he expecting if the payout ratio is 50%?

(b) What is the cost of equity for Verpfndung? What is it for Zeit?

(c) What is the WACC for Verpfndung? For Zeit? What principle have you illustrated?