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ABC Co. and XYZ Co. are identical firms in all respects exceptfor their capital structure. ABC is all equity financed with$650,000 in stock. XYZ uses both stock and perpetual debt; itsstock is worth $325,000 and the interest rate on its debt is 6.5percent. Both firms expect EBIT to be $71,000. Ignore taxes.1. Rico owns $39,000 worth of XYZ’s stock. What rate of returnis he expecting?2. What is the WACC for ABC and XYZ?
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