Answer:
b. 11.74; 14.47
Explanation:
For Cost of Equity:
COE = (EBIT - Interest - Taxes) / Total Equity
ABC Company: EBIT = $62,222, Equity = $530,000, Debt = 0, Tax = 0
COE = ($62,222 - 0 - 0) / $530,000
COE = 11.74
XYZ Company: EBIT = $62,222, Equity = $310,000, Debt = $220,000, Tax = 0, Interest Rate = 7.9% (0.079)
COE = [$62,222 - ($220,000*0.079) - 0] / $310,000
COE = ($62,222 - $17380) / $310,000
= $44842 / $310,000
= 14.465 ≈ 14.47
