ABC Co and XYZ Co

Multiple Choice

ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $480,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $240,000 and the interest rate on its debt is 11 percent. Both firms expect EBIT to be $58,400. Ignore taxes. The cost of equity for ABC is _____ percent, and for XYZ it is ______ percent.

A) 12.17; 12.68
B) 12.17; 12.94
C) 12.17; 13.33
D) 12.29; 12.68
E) 12.29; 13.33