Quis plc and Zanda plc are two companies whose shares are quoted on the London stock exchange. Their assets have the same level of systematic risk. Each company has a constant annual earnings flow (before dividends and interest) of £5 million. This level of earnings is expected to be maintained by both companies in the future. Quis plc. has issued £8 million of 9% irredeemable bonds; each £100 bond is currently quoted at £50. Zanda plc. has no debt. Each of Quis's 17.2 million shares is currently quoted at £1, while Zanda has issued 46.4 million shares each of which has a market price of 50p. Both companies pay out the entire earnings flow each year as dividends and interest. Assume no taxation.

Required:

Calculate the value of both Quis plc and Zanda plc. Is the market in equilibrium?

Calculate the cost of equity and the cost of debt of both companies.

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