Question

XYZ Co. has the following financial information:

Debt: 25,000 bonds outstanding with a face value of $1,000. The bonds currently trade at 91% of par and have 10 years to maturity. The coupon rate equals 3%, and the bonds make semi-annual interest payments.

Preferred stock: 300,000 shares of preferred stock outstanding; currently trading for $153 per share and it pays a dividend of $6.40 per share every year.

Common stock: 1,000,000 shares of common stock outstanding; currently trading for $85 per share. Beta equals 0.88.

Market and firm information: The expected return on the market is 12%, the risk free rate is 3%, tax rate is 21%

e) What is the cost of preferred stock? Enter percentages as decimals and round to 4 decimals

f) What is the cost of common stock? Enter percentages as decimals and round to 4 decimals

g) What is the weighted average cost of capital? Enter percentages as decimals and round to 4 decimals

Answer 1

0165 x v for =+C165/$C$174 A C E D Market value weights 0.5532 After-tax cost % 10.92% =3%+0.88*(12%-3%) Market value $ 85,000,000 =1000000*85 WACC (Cost %*Weights) 6.04% $ 0.2987 1.25% 164 165 Common equity 166 167 168 Preferred stock 169 170 171 Bonds 172 173 174 4.18% =6.4/153 45,900,000 = 300000* 153 $ 0.1481 0.48% 3.24% =RATE(10*2,30/2,-910,1000,0)*2*(1-21%) 22,750,000 =25000*910 Total $ 153,650,000 1.0000 175 176 Weighted average cost of capital (WACC) 7.77% 177 178 Weight of debt 179 Weight of preferred stock 180 Weight of common stock 181 Cost of debt After tax 182 Cost of preferred stock 183 Cost of common equity 184 WACC 0.1481 0.2987 0.5532 3.24% 4.18% 10.92% 7.77%

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